UK: Allen & Overy's Response To The Publication Of The Results Of The EU Feasibility Study

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Allen & Overy LLP's response to the publication on 2 May 2011 of the results of the feasibility study carried out by the Expert Group on European contract law for stakeholders' and legal practitioners' feedback (the feasibility study)

Introduction

In this response we refer to the draft code at annex IV of the feasibility study as the OI (for "optional instrument") or draft code. The Bürgerliches Gesetzbuch (or German Civil Code) is referred to as the BGB and the Code Civil de la République Français (or French Civil Code) is referred to simply as the Code Civil. In Section One, we summarise our general comments on the draft code. In Section Two, we set out more detailed observations on various Articles in the draft code and our responses to specific questions posed in the feasibility study.

The Commission has justified this project on the grounds that a uniform contract law will encourage cross border trade, particularly online trade, throughout Europe. As set out in our response to the Green Paper on European contract law dated January 2011, the Commission has not demonstrated that the absence of such a law is in fact a real obstacle to trade. Indeed, at least in the online sector, evidence suggests that other factors, such as concerns about payment security and shipping costs, are a far greater deterrent to cross border trade than an absence of a uniform governing law.¹ Whilst we support the Commission's aim of promoting the internal market, we have serious reservations as to whether the proposed draft code will achieve its stated objective. Indeed, as discussed below, the introduction of the draft code in the form annexed to the feasibility study risks creating legal uncertainty and undermines freedom of contract and thus is unlikely to be attractive to business.²

This response is submitted by our London office but it contains views from our practitioners elsewhere in Europe. In particular, we record views expressed by practitioners in our Frankfurt office, Amsterdam office and Paris office. It is difficult to review a legislative proposal in the abstract and we have found it helpful to do so by reference to national law. In producing this response, we have therefore sought to compare the OI with existing commercial rules in three major European jurisdictions (England, France and Germany). Unsurprisingly, not all practitioners agree on all issues and, where appropriate, we record differing views on the issues under consideration.

Our client base is predominantly corporates and financial institutions, very often operating on a global basis. In submitting our response, we seek to highlight issues of concern about the OI from the perspective of these businesses. In summary, businesses should not be compelled to contract under the OI. Further, on the text of the OI itself, there are two particular concerns expressed by commercial parties – first, worries about the legal uncertainty that the OI creates and secondly, the draft code's perceived encroachment on parties' freedom of contract.

Section One – Overview

1. No legal basis. The Commission has provisionally identified Article 114 (ex 95) of the Treaty on the Functioning of the European Union (TFEU) as the legal basis for its proposal to introduce the OI. We are concerned that the Commission has not fully demonstrated that it satisfies the necessary legal requirements³ to introduce the OI under Article 114. Self evidently, establishing the proper legal basis for this draft code is an important precondition to progressing this initiative: Europe's law-makers must comply with and respect (and be seen to comply with and respect) European law. We note in this context that in their 2007 report on the Legal Basis for an Optional Instrument on European Contract, Hesselink et al⁴ concluded: "It is not clear that an optional instrument, especially a mere opt-in instrument which is limited to cross-border contracts, would amount to a measure for the approximation of the laws of the Member States, as required by Articles 94 and 95 EC. Moreover, many of the subjects contained in the forthcoming draft CFR would almost certainly not pass the Tobacco test, as they are not directly relevant to the Internal Market."

2. Risk of legal challenge to OI. Related to (1) is the practical risk that a continued failure by the Commission to resolve the fundamental issue of the legal basis for the proposal means that a legal challenge to the draft code is likely. Such a legal challenge may throw into chaos the contracts which businesses and consumers will have concluded under the new code, as well as any legal actions to be determined under the new code which may be pending in member state courts. This would be an unhappy outcome for European citizens, businesses and the institutions of the European Union. It also risks damaging Europe's reputation as a global trading partner. We would therefore urge the Commission and the European Parliament to address this issue as a matter of urgency and to do so openly, with the results of any expert's report on this issue published.

3. Legal uncertainty. In addition to the uncertainty created by the doubt over the legal basis of the draft code, we are concerned that should the draft code be applied in the commercial context, it would introduce elements of uncertainty into business dealings which, at least as far as English law is concerned, did not previously exist. We set out below a few examples:

4. Lack of clarity on scope. The Commission does not appear to have a concluded view on the scope of the OI. This position is unsatisfactory, especially as this is apparently the last formal opportunity for practitioners to comment on the draft code. There is uncertainty in two particular areas (a) which parties the OI covers, and (b) which business sectors the OI is intended to cover. It is not clear how parties are expected to be able to ascertain whether or not they are "interested parties" if the scope of the proposal has not yet been clarified. Parties may not respond to the feasibility study (or earlier consultation) assuming they are outside scope (eg the financial sector or the insurance industry - see further below) only to find that the Commission brings these sectors within scope this autumn. This lack of clarity about the Commission's proposals gives rise to potential injustice. In addition, where parties do decide to respond to the feasibility study, it makes it difficult to do so effectively. In particular, certain provisions in the draft code may be unsuitable for contracts between particular types of parties (eg contracts between commercial parties or unsuitable for contracts in a particular business sector (eg financial services contracts). However, because the Commission has failed to confirm whether or not certain parties or types of contracts are within scope, such drafting difficulties may not be picked up. We highlight below two particular areas where there is a lack of clarity:

5. Is the instrument truly optional? Much has been said about the OI being an optional instrument, but nowhere in the draft code are the detailed mechanics or technicalities of the option set out. Given that the Commission and the European Parliament have sought to refer to "optionality" as being a positive benefit of the proposal and in particular sought to reassure businesses that they will not be compelled to contract on this basis, it is unsatisfactory that, even at this stage, there is a lack of clarity as to who might exercise this option. It remains unclear for example whether a consumer can always seek to contract on this basis. In other words, can a consumer force a business counterparty to contract under the OI? We understand Commissioner Reding suggests it can, whereas MEP Klaus-Heiner Lehne we understand has suggested it could not. The Commission's failure to clarify this fundamental feature of its proposals is further evidence that this draft code is not ready to be put forward as legislation.

6. Unfairness of Process. The Commission gave interested parties just two months in which to consider, debate and give feedback on a new draft code, composed of 189 Articles. The Expert Group were also given a very short period to draft the code (the BGB by contrast was debated for over 30 years as to its substance⁵). The Commission should allow plenty of time for necessary investigations and research to be carried out in relation to this measure, eg to carry out a proper costs analysis of implementation, to review the legal basis, to clarify and consult on scope and content. Contract law is just too important for Europe's citizens and businesses to allow a political agenda to dictate the timetable of this new code. Moreover, aside from a brief, but helpful introduction, there is no explanatory memorandum accompanying the draft code to aid interpretation.⁶ A briefing/explanation of this type would be extremely helpful to European citizens, businesses and practitioners alike and, if there was more time, it would permit such a memorandum to be prepared. We also understand that the current Commission's exercise in seeking responses to the feasibility study is taking place at a time when legislative time has already been booked in Parliament's schedule for October 2011 to introduce this code. We are concerned by what appears to be an unnecessary and counter-productive race to press ahead with this measure. We fear it may lead to the creation of bad law and cause unnecessary difficulties for parties contracting under this draft code and to litigants seeking to resolve disputes under the new code.

7. Deficiencies in the Impact Assessment. The Impact Assessment did not appear to place any weight on the "do nothing" opinion. It also appears to have sought evidence from only 10 Member States. The Impact Assessment did not appear to consider the impact the draft code might have on the financial sector. Notwithstanding this position, there are suggestions that this hugely important sector in Europe may in fact be within the scope of the OI (as discussed above – there is uncertainty about scope). We do not believe that the draft code should apply to business to business contracts. We also believe that financial contracts should be excluded from the scope of OI, especially given the impact assessment was restricted to sale of goods. To do otherwise at this juncture and especially in circumstances where this research has not been carried out, would be unfair and risk damaging an important business sector in Europe.

8. Costs of implementation of the draft code. Related to 7 above, there was no analysis in the Impact Assessment of the costs involved in implementing the OI. We believe this should be addressed properly before progressing further with this initiative. Introducing a new code will involve training judges and lawyers (both private practice and in-house lawyers). It will also involve changes to legal training generally. Some jurisdictions may require more training than others. There is an important political issue to address here, namely, should the limited resources of the Justice Departments of member state Governments be devoted to this initiative at this time of austerity for many member states? We do not, of course, seek to answer this political question, but we do suggest that the necessary data should be available to member state Governments and other stakeholders to assess what portion of those public funds would be required to progress this initiative at a time. The Commission must address directly the question of costs and carry out a proper investigation of the costs associated with the introduction of this code, including assessing any additional costs for businesses in appealing issues to the ECJ, the ultimate appellant court in respect of this code.

9. Uncertainty about the exercise of the option by consumers. As noted at 5 above, the OI says nothing about how, by whom or in what circumstances it might be chosen. There is particular uncertainty about the position of consumers. As we noted in our response to the Green Paper, this is of paramount importance. Reference has been made by Commission officials to the "blue button" (ie the European flag) which could be "pressed" by a consumer to elect to have a contract governed by the OI.⁷ Commissioner Reding's speech on 3 June 2011 in Leuven tends towards this approach: "The objective is clear: The optional instrument can only apply on the basis of a conscious decision by the consumer." However this gives rise to a number of issues. As Professor Simon Whittaker notes in his response to the Green Paper⁸, it is not clear how the average consumer is to choose whether to have his contract governed by the OI or his national law, without a thorough and costly assessment. It is also unclear how it is envisaged that businesses would enable the consumer to make an informed choice, as they are required to do under the Unfair Commercial Practices Directive 2005; and, if the choice were truly informed, whether the Commission expects there to be much demand for the OI by consumers, given that it may offer less protection than a particular consumer's national law. Alternatively, it has been suggested that it is only practical for businesses to choose whether or not to contract under the OI. We suggest that the choice of OI should be a mutual choice made by all parties to a transaction.

10. Rome I. We understand that the Commission plans to take the OI "outside" of Rome I. Article 6(2) provides that whatever the governing law of a contract, consumers shall not be deprived of the protections afforded to him by provisions that cannot be derogated from by agreement by virtue of the law of his habitual residence. The basis upon which the Commission seeks to avoid the consumer protection provisions in Rome I is unclear. Nor is it clear what, if any, amendments are planned in respect of Rome I. Related to this is another issue that arises should the OI be deemed "outside" Rome I, namely, what happens when there is a dispute about whether a choice or option has been exercised? Can the OI be applied in the context of a consumer (or indeed business to business) dispute in circumstances where there is found to be no option exercised ie no express choice? Rome I of course provides a framework of rules which member states apply in these circumstances. These important issues must be addressed before the proposal is progressed.

11. A self-standing instrument of European contract law. Whilst the theory behind creating an autonomous OI is understood, we are concerned about how this approach will work in practice. Article 1(2) expressly forbids any recourse to national laws. If, for example, a party seeks advice from its lawyer about what it is required to do by way of pre-contractual disclosure under Article 23 or what is meant by the requirement for reasonableness (which is well understood under English law) or good faith (which is well understood under both German and French law), it is going to be very difficult in each case for lawyers to provide such advice with any certainty. There will be an absence of pre-existing case law. As noted above, there is no explanatory memorandum to the OI. It seems likely that parties will need to litigate to resolve matters of interpretation of the OI which would ultimately have to be resolved by the ECJ. It will therefore be many years before there is a body of jurisprudence relating to interpretation. Parties may well try to re-argue points that have already been settled under national law. We note the United Nations Convention on Contracts for the International Sale of Goods (CSIG) does not go as far as providing interpretative rules.

12. Evidence cited in the feasibility study. The feasibility study gives the examples of a Mrs Korhonen from Turco, Finland whose daughter, Taru, wants to buy clothing from Paris; as well as a Mr Kowalski, the owner of a small Polish furniture company, who wants to sell his furniture to German and Italian retailers. Mrs Korhonen, it is claimed, does not shop cross-border because she is uncertain about her rights and therefore faces a more restricted choice and higher prices. Mr Kowalski does not want to pay for the legal and translation costs of contracting under German and Italian law. These examples appear to us to be somewhat artificial and inadequate support for the draft code. They are not expressed to be supported by any evidence that they are representative of the actual views of EU citizens. It would be equally possible to construct scenarios that would be illserved by the OI. For example, a French consumer contracts under the OI and discovers that his MP3 player has a hidden defect which he could claim for under French law, but cannot under the OI.

13. Recognition of OI by non EU courts. We would be interested to hear what investigations have been made into whether or not foreign courts would recognise the OI as a choice of law in any contracts to be determined before such courts. Rome I currently provides that member state courts will only apply the governing law of a nation state eg not Sharia law. This question is obviously important to businesses operating globally and must be addressed before the initiative progresses. If the answer to the question about recognition of the OI in important trading centres, such as Hong Kong and New York, is negative, then it is difficult to see why any international business would chose to contract on this basis (whatever its ultimate content).

14. Tort and restitutionary claims still governed by national law. Many disputes at least before the English courts, involve concurrent claims made in contract and tort, especially claims made in the financial context. If the OI is the governing law of a contract and a concurrent tort claim is brought with a breach of contract claim, then the contractual claim will be resolved under the OI, but the related tortious claim (eg negligence, misrepresentation) will remain to be determined by national law. This will inevitably add complexity to the resolution of disputes. It is a point that may have been overlooked by those who argue that the OI will allow businesses to pursue or defend claims across Europe without the need to investigate different local laws. In many cases, eg mis-selling complaints or when there is a related claim for breach of a statutory duty this requirement for local law knowledge will remain. Further, restitutionary claims remain to be resolved under national law. This means that if a contract is found to be null and void, a restitutionary claim made by a party to recover monies paid under that void contract will still be determined under national law. In this context it is noteworthy that the introduction of Rome II (Article 14) has proved helpful in the commercial context because it allows parties to contracts to agree that any tortious claims arising out of or connected to that contract will be governed by the law governing the contract. This provision in Rome II means, amongst other things, that disputes involving concurrent tortious and contractual claims can be dealt with efficiently because those claims will be subject to the same law. Of course, in terms of jurisdiction (not substantive governing law) businesses operating throughout Europe will still need to become familiar with the different legal procedures across Europe because under Article 16(2) of the Brussels Regulation proceedings brought against consumers must be brought in the courts of the place of the consumers' domicile.

15. Other issues. The draft code appears to be silent on certain important issues, for example, capacity. Does this mean that concepts such as capacity will continue to be governed by national law? If so, how is one to determine which national law rules will apply? In the Code Civil capacity, is addressed as an essential requisite for the validity of an agreement. This gives rise to the prospect that in certain contractual disputes, parties (and the member state courts) will have to apply not just the OI but also a national governing law to determine the dispute. Further, there seems to be no equivalent of the force obligatoire du contrat in the OI, which is another essential concept of French contract law.

Section Two - Specific comments

We have some concerns about the drafting of the OI - there are inconsistencies within the draft text and there is an over reliance on the passive tense. It may be that the speed with which the Expert Group had to produce the draft explains some of these issues. Whatever the ultimate scope of any instrument, we would encourage the Commission to allow sufficient time at the drafting stage of any new instrument so that, as far as possible, there is ample opportunity for errors to be eliminated from the text.

Part I 'Introductory Provisions'

Good faith: English lawyers are concerned that the introduction of requirements of "good faith" and "fair dealing" will undermine the certainty that underpins their understanding of commercial contracts. To their mind, it is not a concept appropriate to arm's length business dealing. It is also unclear from the OI when, and the extent to which, provisions that require good faith and fair dealing can be excluded from business-tobusiness contracts (if the OI were to apply to such contracts). Whereas certain specific rules mentioning good faith (eg Article 23 or 27) may be contracted away, the general principle under Article 8 may not. In financial transactions the occurrence of a specified event may, of itself, immediately entitle the other party to terminate the contract or exercise particular rights. The importance of hedging and netting of different contracts depends on their being interpreted in the same manner without, for example, a requirement to allow more time for performance or to take into consideration the reason for a failure to perform or the consequences on the other party's business of exercising a right or terminating the contract. Article 8, for example, give rise to concerns to English lawyer because it introduces the concept of the abusive exercise of a right, with the consequence that the strict exercise of express rights in a contract could be deemed abusive and moreover gives rise to a damages claim by the counterparty.

Reasonableness: German and French lawyers may find reasonableness to be a rather vague concept and may have difficulty advising how this would be applied to particular circumstances. Also, courts in the various member states with different cultural backgrounds are likely to have divergent ideas of what would be a reasonable period of time to effect cure of non-conformity under Article 110(5). This, of itself, highlights the considerable challenge when creating a new code that is inspired by civil and common law concepts.

The standard practice adopted by businesses in their contracts is to define terms which they wish to have greater certainty. Is it envisaged that this would be possible under the OI? For example, if you specify a 30 day time limit, can this be overridden by the reasonableness requirement? If so, this would give rise to a great deal of uncertainty in commercial contracts.

Unilateral statements or conduct:

At first glance, having statements interpreted by reference to how they might be understood by the person to whom they are addressed seems sensible. However, there is in fact no reference to reasonableness and so the rule could introduce an unwanted level of subjectivity (and a corresponding lack of certainty) into rules of construction.

Part II 'Formation of contract and rights to withdraw or avoid'

Article 23:

(1) Before the conclusion of a contract for the supply of goods or services by a business to another business, the supplier has a duty to disclose to the other business any information concerning the main characteristics of any goods or services to be supplied which the supplier has or can be expected to have and which it would be contrary to good faith and fair dealing not to disclose to the other party.

(2) In determining whether paragraph (1) requires a party to disclose any information, regard is to be had to all the circumstances, including:

(a) whether the party had special expertise;

(b) the cost to the party of acquiring the relevant information;

(c) the ease with which the other party could have acquired the information by other means;

(d) the nature of the information;

(e) the apparent importance of the information to the other party; and

(f) good commercial practice in the situation concerned.

This appears to reverse the common law rule of caveat emptor by requiring the pre contract disclosure of "any information concerning the main characteristics of ... goods or services ... which it would be contrary to good faith and fair dealing not to disclose to the other party". Businesses know that they must not misrepresent their products, but this duty to disclose is likely to have uncertain consequences, particularly when judged with hindsight. This provision seems particularly unsuitable for business to business contracts.

Article 27:

(1) A person is free to negotiate and is not liable for failure to reach an agreement.

(2) A person who is engaged in negotiations has a duty to negotiate in accordance with good faith and fair dealing and not to break off negotiations contrary to good faith and fair dealing. This duty may not be excluded or limited by contract.

(3) A person who is in breach of the duty is liable for any loss caused to the other party by the breach.

(4) It is contrary to good faith and fair dealing, in particular, for a person to enter into or continue negotiations with no real intention of reaching an agreement with the other party.

The OI introduces a duty to negotiate in accordance with good faith and fair dealing and not to break off negotiations contrary to good faith and fair dealing. This duty may not be excluded by agreement. Businesses need to know that the deal is not done until they have signed. This duty could have uncertain and unintended consequences. Typically, in international business-to-business transactions where a civil law would otherwise apply, the parties often either contract out of the obligation or opt to contract under English (or New York) law. We also do not know what the Commission's intention is from a conflict of law perspective. How are parties to know whether they are bound by this provision if they have not, at the point of breaking off negotiations, opted for their agreement to be governed by the OI eg if it is one of the points under discussion in a draft contract?

Articles 29:

(1) A contract is concluded if:

(a) the parties reach an agreement;

(b) they intend the agreement to have legal effect; and

(c) the agreement, supplemented if necessary by rules of law, has sufficient content and certainty to be given legal effect.

(2) Agreement may be reached by acceptance of an offer or by other statements or conduct.

(3) The intention of the parties that the agreement will have legal effect is to be determined from their statements and conduct interpreted in accordance with the rules on interpretation in Article 12.

(4) If one of the parties makes agreement on some specific matter a requirement for the conclusion of a contract, there is no contract unless agreement on that matter has been reached.

Article 33:

(1) Any form of statement or conduct by the offeree is an acceptance if it indicates assent to the offer.

(2) Silence or inactivity is not in itself acceptance.

It is unclear what "by other statements or conduct" in Article 29(2) means. Article 33 sets out that an acceptance can be made by any form of statement or conduct if it indicates assent to the offer. So what purpose is left for Article 29(2)? It could read instead as "by acceptance of an offer as set out in Article 33".

Article 30:

(1) A proposal is an offer if:

(a) it is intended to result in a contract if it is accepted; and

(b) it has sufficient content and certainty for there to be a contract.

(2) An offer may be made to one or more specific persons or to the public.

(3) Unless the circumstances indicate otherwise, a proposal by a business to supply goods at a stated price, made by a display of goods or made in a public advertisement or a catalogue referring to an identified stock, is an offer to any person who may lawfully buy the goods to supply them at that price until the goods displayed or the stock is exhausted.

If a supplier makes a proposal to supply goods by display of the goods, or reference to an identified stock, at a stated price which is erroneous, it is obliged to supply at that price until the goods displayed or the stock is exhausted. Under English law this error might be dealt with by reference to the concept of invitation to treat.

Article 37:

(1) A reply by the offeree which states or implies additional or different terms which materially alter the terms of the offer is a rejection and a new offer.

(2) A reply which gives a definite assent to an offer is an acceptance even if it states or implies additional or different terms, provided that these do not materially alter the terms of the offer. The additional or different terms then become part of the contract.

(3) A reply which states or implies additional or different terms is always a rejection of the offer if:

(a) the offer expressly limits acceptance to the terms of the offer;

(b) the offeror objects to the additional or different terms without undue delay; or

(c) the offeree makes the acceptance conditional upon the offeror's assent to the additional or different terms, and the assent does not reach the offeree within a reasonable time.

The concept of modified acceptance is likely to give rise to practical difficulties. How will the parties ascertain whether a suggested alteration is either: material or a non-material additional?

Article 38:

(1) Where the parties have reached agreement except that the offer and acceptance refer to conflicting standard terms, a contract is nonetheless concluded. The standard terms are part of the contract to the extent that they are common in substance.

(2) No contract is concluded if one party:

(a) has indicated in advance, explicitly, and not by way of standard terms, an intention not to be bound by a contract on the basis of paragraph (1); or

(b) without undue delay, informs the other party of such an intention.

The OI introduces the novel concept (to English law) that standard terms become part of the contract to the extent that they are common in substance, so the contract can become binding even though there is no agreement on the terms which are not common in substance and apparently even if there is no agreement on significant terms of the contract. From an English law perspective, this seems to be a recipe for confusion. We are aware that this concept has been known to German law for some time.

We also note that the definition of "standard terms" (Article 2(17)) would appear to be wider than that under English law. We note it provides "the standard terms are part of the contract to the extent that they are common in substance". This is unclear. This provision is also very different from the position under Dutch law. Under Dutch law, standard terms are not separate from the main contract and can in fact contain essential provisions. Also, standard terms are often linked together, and it may not be the intention of a party for only a part of them to apply.

Article 48:

(1) A party may avoid a contract if, at the time of the conclusion of the contract:

(a) the party was dependent on or had a relationship of trust with the other party, was in economic distress or had urgent needs, was improvident, ignorant, inexperienced or lacking in bargaining skill; and

(b) the other party knew or could be expected to have known this and, given the circumstances and purpose of the contract, exploited the first party's situation by taking an excessive benefit or unfair advantage.

(2) Upon the request of the party entitled to avoid the contract, a court may adapt the contract in order to bring it into accordance with what probably would have been agreed had the requirements of good faith and fair dealing been observed.

(3) Upon the request of a party receiving notice of avoidance for unfair exploitation, a court may adapt the contract in order to bring it into accordance with what probably would have been agreed had the requirements of good faith and fair dealing been observed, provided that the party receiving notice informs the party who gave the notice without undue delay after receiving it and before the latter party has acted in reliance on it.

The idea that a contract can be avoided if one party had "urgent needs" or is "improvident, ignorant, inexperienced or lacking in bargaining skills" and the other party exploits this by "taking an excessive benefit or unfair advantage" is an anomalous concept to English law and, on balance, not one that we believe is best suited to business-to-business relationships. To an English lawyer, this appears to mean that, in certain cases, if you advise or educate your clients you might put them at a disadvantage. This is a startling proposition. If what is meant is akin to the German law concept which exists as part of usury (Wucher) then maybe it is only intended to apply in very exceptional circumstances. The Commission should clarify what is meant by "excessive benefit" or "unfair advantage". In Germany, long-standing case law says that there is a rebuttable presumption for an obvious disparity (auffälliges Missverhältnis) between the performance and the consideration, if the value of the consideration exceeds the value of the performance by 100%.

In the Netherlands there is a similar provision called "misuse of circumstances" but the scope of Article 48 is much wider than this provision. From a Dutch perspective, Article 48 is much too detailed and prescriptive. The term "lacking in bargaining skills" suggests there if you are not good at negotiating, you may have a chance to avoid your contract which is not a sensible commercial approach.

Part III 'Assessing what is in the contract'

Article 56:

(1) A contract is to be interpreted according to the common intention of the parties even if this differs from the normal meaning of the expressions used in it.

(2) If one party intended an expression used in the contract to have a particular meaning, and at the time of the conclusion of the contract the other party was aware, or could be expected to have been aware, of this intention, the expression is to be interpreted in the way intended by the first party.

(3) Unless otherwise provided in the preceding paragraphs, the contract is to be interpreted according to the meaning which a reasonable person would give to it in the circumstances.

This provides for interpretation in accordance with the common intention of the parties and, subject to this, according to the meaning which a reasonable person would give it. This appears to reverse the common law approach of starting with "... the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract...".⁹ The test proposed by the OI affords greater opportunities to argue over intention and, once again, there will be uncertainty over how the courts will apply the OI. It is undesirable for the parties to be bound by a contract which is the result of a judicial interpretation of what the intention is, rather than what the words say. It is also not in line with German law from where the rule appears to be derived. Although §133 BGB provides "it is necessary to ascertain the true intention rather than adhering to the literal meaning of the declaration", under long-standing case law any interpretation must start with the wording, and only if this is ambiguous may the other circumstances become relevant at the second stage. As recourse to national laws is not allowed, we therefore suggest a clarification that the wording of a contract is always the starting point for interpretation. This is vital for legal certainty. It is also unclear what happens under (2) if both parties intended different meanings and the other party should have been aware – which party's interpretation do you rely upon?

Under Dutch law although the courts look at all the circumstances of the case when interpreting a contract they will generally assume the written provisions of the contract are the starting point (unless they are unclear). Further, under Dutch law there is an important distinction between contracts affecting the parties only and those contracts affecting the rights of third parties.

Article 57:

In interpreting a contract, regard may be had, in particular, to:

(a) the circumstances in which it was concluded, including the preliminary negotiations;

(b) the conduct of the parties, even subsequent to the conclusion of the contract;

(c) the interpretation which has already been given by the parties to expressions which are similar to those used in the contract;

(d) practices which the parties have established between themselves;

(e) the meaning commonly given to expressions in the branch of activity concerned;

(f) the nature and purpose of the contract;

(g) usages; and

(h) good faith and fair dealing.

According to this provision, both preliminary negotiations and subsequent conduct may be taken into account when interpreting a contract. Whilst there can be debate about the extent to which negotiations should be taken into account as an aid to construction, we believe taking account of subsequent conduct to be wrong in principle. The parties' conduct subsequent to the conclusion of the contract would seem to relate to whether the parties have varied the terms of the contract by their conduct rather than adhering to what the contract meant at the time of its conclusion. This is an important distinction, particularly in relation to contracts that confer rights on third parties or where the contract has been assigned by way of security for a financing. Again, this rule may have been intended as it is recognised in German case law: later conduct cannot change the meaning of a contract – it can only serve as a clue by allowing inferences on the actual intention at the time of the conclusion of the contract. We suggest clarifying this.

Prior statements, undertakings or agreements which are not embodied in the document can be excluded under Article 68 but this would not seem to include all negotiations (eg draft agreements).

Articles 56 and 57 appear to mean that a court is required to undertake a wide-ranging (and costly) exploration of the contractual premises and their surroundings from the parties' first discussions about the contract, through market practice, and on to the parties' performance. The parties will never feel confident that what they actually wrote down means what it says. The suggested clarifications would avoid this consequence.

Article 63:

Where, in a contract which does not fall under Article 62, there is doubt about the meaning of a term which has not been individually negotiated, an interpretation of the term against the party who supplied it is to be preferred.

By this provision, the OI penalises whoever supplies the contract with the consequences of having provided either standard terms or terms drafted in advance, by calling for ambiguous terms to be construed against them as the provider of the contract. Under English law there is the contra profereneum rule by which ambiguous terms are construed against the party seeking to rely upon them (rather than against the party that supplied the standard terms as per draft code).

Article 67:

(1) If one of the parties to a contract is a business and before the contract is concluded makes a statement, either to the other party or publicly, about the characteristics of what is to be supplied by that business under the contract, the statement becomes a term of the contract unless:

(a) the other party was aware when the contract was concluded, or could be expected to have been so aware, that the statement was incorrect or could not otherwise be relied on as such a term; or

(b) the other party's decision to conclude the contract could not have been influenced by the statement.

(2) For the purposes of paragraph (1), a statement made by a person engaged in advertising or marketing for the business is regarded as being made by the business.

(3) Where the other party is a consumer then, for the purposes of paragraph (1), a public statement made by or on behalf of a producer or other person in earlier links of the chain of transactions leading to the contract is regarded as being made by the business unless the business, at the time of conclusion of the contract, did not know and could not be expected to have known of it.

(4) In relations between a business and a consumer the parties may not, to the detriment of the consumer, exclude the application of this Article or derogate from or vary its effects.

This provides that pre-contractual statements about the goods or services (including those in advertising and marketing materials) become terms of the contract (unless excluded). Businesses will be aware that they cannot make misrepresentations, but may be surprised by this concept, which may have unintended consequences. We think there should be a clarification that not every pre-contractual statement praising the goods or services will become a contract term.

Article 70:

Where the amount of the price payable under a contract cannot be otherwise determined, the price payable is, in the absence of any indication to the contrary, the price normally charged in comparable circumstances at the time of the conclusion of the contract or, if no such price is available, a reasonable price.

To allow the court to determine what the price should have been if the price is not mutually agreed by the parties introduces uncertainty. This would not arise if the court was able to conclude that there is no contract at all since an essential element of the contract is missing.

Article 85:

(1) A term in a contract between businesses is unfair for the purposes of this Section only if:

(a) it is a term forming part of not individually negotiated terms supplied by one party;

(b) it significantly disadvantages the other party; and

(c) it is of such a nature that its use grossly deviates from good commercial practice, contrary to good faith and fair dealing.

(2) When assessing the unfairness of a term for the purposes of this Section, regard is to be had to the nature of what is to be provided under the contract, to the circumstances prevailing during the conclusion of the contract, to the other terms of the contract and to the terms of any other contract on which the contract depends.

Our concern here, at least from an English law perspective, is whether this standard (which provides that terms in business-to-business contracts are unfair, if they are not individually negotiated, significantly disadvantage the other party and grossly deviate from good commercial practice, contrary to good faith and fair dealing) is the same in substance as the test of reasonableness under the UK Unfair Contract Terms Act 1977.

Article 87:

A term contained in standard terms supplied by one party which is of such a surprising nature that the other party could not have expected it is unfair for the purposes of this Section unless it was expressly accepted.

We believe that the ability to treat as unfair a term "which is of such a surprising nature that the other party could not have expected it" is not something that legally advised businesses should be able to argue in a dispute. It seems to carry with it the idea that you are better off not reading a contract. We are aware that in Germany, as a result of decades of case law, a similar rule works in practice, but again this is an example of where the OI would benefit from greater clarity.

Part IV 'Obligations and remedies of the parties to a sales contract'

Articles 91 and 92¹⁰ (please also see answer to question 3 below): Business-to-business contracts often contain force majeure provisions. They are usually negotiated carefully to avoid uncertainty and any unintended consequences. The OI introduces a general concept of force majeure. Performance is excused "due to an impediment beyond that party's control". The general consequences of this are termination of the contract and no right to damages. Parties are also obliged to re-negotiate the contract if there is "an exceptional change of circumstances". It is very unlikely that a heavily negotiated business-to-business contract would contain such an open-ended get-out clause as this. From an English law perspective, we would rather not include these Articles. From a German law perspective, these provisions seem less objectionable and the drafting is thought to be clearer than the existing equivalent German rules.

Article 105:

The goods must be free from any right or not obviously unfounded claim of a third party, including rights or claims based on intellectual property.

This provides that goods must be free of any "not obviously unfounded claim of a third party" and includes intellectual property rights. Our concern is the uncertainty of knowing a claim is "not obviously unfounded" unless it has been tested by the court. A right is either founded or not.

From a Dutch perspective at least, this provision seems unworkable. Under Dutch law it is possible to sell goods even if these are rights or claims from third parties. For example, it is possible to sell assets which are pledged or mortgaged or which are subject to an IP right from a third party. The rights under the pledge/mortgage "follow" the goods to the new owner.

Footnotes

^{1 http://www.allenovery.com/AOweb/binaries/59910.pdf .}

^{2 See http://ec.europa.eu/justice/news/consulting_public/0052/contributions/5_en.pdf}

^{3 Bar Council of England and Wales response to Green Paper states.}

^{4 Hesselink, Martijn W., Rutgers, Jacobien W. and De Booys, Timothy Q., The Legal Basis for an Optional Instrument on European Contract Law (31 October 2007). Centre for the Study of European Contract Law Working Paper No. 2007/04. Available at SSRN: http://ssrn.com/abstract=1091119 .}

^{5 Bundestag's response to the Green Paper.}

^{6 As was the case when certain chapters were released in draft form.}

^{7 First proposed, we understand, by H Schulte-Nölke. See "EC Law on the Formation of Contract – from the Common Frame of Reference to the "'Blue Button'" (2007) 3 ERCL 332, 348 and 349.}

^{8 See http://ec.europa.eu/justice/news/consulting_public/0052/contributions/333_en.pdf .}

^{9 Investors Compensation Scheme v West Bromwich Building Society [1998] 1 WLR 896.}

^{10 These are too long to set out in full in here}

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