European Union: European Contract Law: One Law For All?

Last Updated: 10 August 2011
Article by Martin Gleeson

Background

The European Commission (the "Commission") has long been of the opinion that the smooth operation of the internal European market has been hindered by the divergence of national contract laws between Member States. The Commission believes that cross-border trade has been inhibited by the differences in national contract laws, which often result in additional transaction costs (e.g. adapting contractual terms and commercial policies or obtaining translations of the applicable laws), legal uncertainty for businesses and a lack of consumer confidence in the internal market. The European Commissioner for Justice, Viviane Reding commented:

"I want a Polish, German or Spanish consumer to feel safe when doing business with an Italian, Finnish or French company online as when they are at home. And I want Europe's small and medium-sized companies to offer their products and services to consumers in other countries without having to become experts in the national contract law systems of all other 26 EU countries".

In order to overcome these alleged obstacles to trade, in 2003 the Commission set about the task of producing a "common frame of reference" ("CFR") for contract law, with the aim of establishing a set of common principles to be used by Member States when making or amending legislation. Although the purpose of the CFR has changed since its inception, at the time of its draft publication in early 2009, the European Parliament gave its support to using the CFR as a basis for an optional European Contract Law.

What is the Commission proposing?

In April 2010, the Commission set up an expert group to review the draft CFR with the aim of using it as the basis to consider and revise those parts relating to contract law. On 1 July 2010, the Commission published a Green Paper in which the following policy options to achieve a more coherent approach to contract law:

  1. Publication of the expert group's findings setting out model contract rules. These rules could be voluntarily adopted by European and national legislators when drafting legislation.
  2. A binding or non-binding "toolbox" for legislators when adopting new legislation to ensure better and more coherent rules.
  3. A European Commission Recommendation on European contract law. The Commission would encourage all Member States to incorporate a European contract law into their national laws. This would allow Member States voluntarily to adopt the European contract law. A similar scheme has worked well in the United States where all but one of its 50 states have adopted the Uniform Commercial Code.
  4. An optional European Contract Law, which could be chosen freely by consumer and businesses in their contractual relations. As a result contracting parties could choose to have their contract governed by this optional European Contract Law rather than their own national laws.
  5. Minimum harmonisation of national contract laws. An EU Directive would be passed which would seek to harmonise a key set of contractual laws between Member States.
  6. Full harmonisation of national contract laws. An EU Regulation would be passed which would replace all national contract laws with a uniform set of rules.
  7. Full harmonisation of national civil codes. An EU Regulation would be passed which would not only replace all national contract laws, but also property law, tort law and the law of general obligations.

So what next?

The Green Paper has invited responses on the above options. Meanwhile, before considering whether any EU intervention in the area of contract law is needed, the UK Government has launched its own consultation on the Green Paper via a "Call for Evidence" to establish if there is a problem for cross-border trade associated with differences between national laws.

Surveys undertaken in respect of a single European contract law suggest that businesses, at least, would support a harmonisation of national contract laws on the basis that foreign legal advice and the variations in legal systems have constituted obstacles to cross-border trade in the EU. However, it is questionable whether a consumer purchasing goods via the internet or in person while abroad gives any thought to the law governing their purchase.

Although the Commission appear to have given us a wide range of options, there is an underlying feeling in the legal community that many of the options are simply there to make up the numbers. The first three options have been widely disregarded on the grounds that the Commission has not spent the best part of 10 years to produce a contract code which they will only encourage people to use. At the other end of the spectrum, the last two options also appear unlikely to be adopted as each would require each Member State to throw its entire book of national contract laws onto the bonfire. The fifth option would seem to rule itself out on the basis that although it would achieve a degree of convergence between national contract laws, there would still remain a high degree of disparity resulting in an unsatisfactory half-way house.

Somewhat by default, we are left with option 4, namely the establishment of a 28th contract law regime, which would sit alongside the national contract laws of each of the 27 Member States. Some may argue that the introduction of this optional law may only serve to complicate the legal environment; but it appears Viviane Reding is giving it serious thought as evidenced by her summer visit to Washington where she met experts on the US Uniform Commercial Code to discuss the prospect of creating a 28th regime. However, the Government's Call for Evidence suggests that the Ministry of Justice remains sceptical about the concept of an optional European Contract Law.

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