UK: Contract — A New Rome? — An Opinion On The Proposals For A New EU Contract Law

Last Updated: 28 November 2011
Article by Richard Farnhill

"All peoples who are governed under laws and customs observe in part their own special law and in part a law common to all men." (Gaius, Institutes, Book 1).

Gaius was a Roman jurist writing during the reign of Marcus Aurelius, when the Roman Empire reached its height. At that time, England and Wales, France, the Benelux countries and much of southern and central Europe comprised part of the Empire and were subject to Roman law. It was the last time that so large a part of Europe applied the same rules of contract, those set out for the most part in Gaius' Institutes.

The European Commission appears determined to change that, however, with an ambitious proposal to implement a single system of contract law, equally applicable in all member states. At this stage, the political drive for such a proposal is more developed than is its precise legal form, but the proposal is advancing quickly and, if implemented, it may fundamentally change the law of contract and, with it, the way that EU based parties are able to carry on their business.

What is it all about?

The European Commission has been considering various alternatives aimed at, to a greater or lesser extent, harmonising the various systems of European contract law. In July 2010 the Commission published a consultative Green Paper proposing seven options, ranging from publication of the conclusions of an expert group through to an EU Regulation Establishing a European Civil Code.

Whilst the Commission stated that the purpose of the exercise was to consult, and described the seven possible routes as options, it also made clear that it favoured option four, the optional instrument. This would entail a Regulation setting up an optional instrument of European Contract Law, essentially creating a 28th system of contract law that parties could elect to have govern their contract, just as they could select, for example, English or French or New York law.

The response was mixed. Most respondents were comfortable with options such as publishing the conclusions of the expert group and preparing a "toolbox" of approaches that could be used by a national legislature when enacting new laws. Backing for option three, a Commission recommendation on European Contract Law, was more muted. Option four had its supporters (including the British Retail Consortium, some law firms and some academics), but a greater number of respondents opposed it (including the UK government, the Law Society, the Bar Council, the consumer organisation Which?, a number of other law firms and, again, some academics). There was felt to be no clear evidence of need for options five to seven, each of which involved establishing a single, mandatory European Contract Law.

In April 2011, the European Parliament endorsed the "elaboration" of an optional instrument. It was clear from the Commission's press release in response that option four remains its favoured option.

Does it really matter?

The idea of in some way harmonising the various European contract law systems is not a new one; proposals have been floated for the last 30 years and the current approach, based on the Common Frame of Reference, can be traced back at least ten years to the Commission's Communication on European Contract Law. In certain fields, of course, particularly as regards consumers, some progress towards harmonisation has already been achieved through specifically targeted Directives. One might ask what differences further harmonisation will make.

There would be at least two. First, whereas earlier reforms have focussed on harmonising national laws, an approach based on an optional instrument would create an entirely new contract law that would run parallel to existing national law. As such, it would involve every lawyer in Europe who practices in the field of contracts being, essentially, dual qualified: in their national law and that of the optional instrument. Second, the proposed reforms will have to be far more pervasive than anything that has gone before because the new system will have to be entirely free standing. Consider, for example, whether the following issues might ever come up in your practice:

  • Promises have been made in the course of pre-contractual negotiations; are they binding?
  • One party wants to rely on pre-contractual exchanges for the purposes of interpreting the contract; can it?
  • One party gratuitously promises to carry out work for another; can that promise be enforced?
  • In entering into the contract, through no fault of the seller the buyer has made a mistake as to some feature of the goods being sold; can the buyer set aside the contract?

In all four cases, the answer under English law is probably no; the answer in several European systems, and so potentially under the optional instrument, would be probably yes. None are currently affected by any harmonising measures. Of course, on one level, any change in the law governing the parties' relationship will have the potential to affect the result. Often, however, it will be reasonably obvious when a conflict of laws issue is potentially in existence. If both systems co-exist in national law, identifying even the existence of the issue may become more difficult.

What are the issues with the optional instrument?

As we have seen, the Commission appears currently to favour the optional instrument. That approach presents a number of questions. Some are rather technical. For example, the Commission is obliged to identify the constitutional basis for any legislation it enacts; none is readily apparent in the case of the optional instrument. Many other issues are more practical, however:

  • What is it? Various parties have endorsed the idea of an optional instrument but only in principle: initially just three chapters were available, and the expert group report was only published on 3 May 2011. As with the question of whether one favours marriage, the devil is in the detail: it is possible to endorse the general idea but still want some say in the identity of one's spouse. Earlier drafts of the Common Frame of Reference have been heavily criticised; whether any other detailed proposal will garner more support remains to be seen.
  • How much will it cost? An optional instrument will essentially involve all contract lawyers becoming dual qualified. Given the potentially striking differences between systems, any advice may well need to address the position both under national law and under the optional instrument. An impact assessment is now under way, although its terms of reference are limited; notably, it will not consider the possibility of maintaining the status quo.
  • Who will interpret it? If the idea is uniformity, the optional instrument will need to be given a uniform interpretation (in all 22 official languages). The current proposal is to have interpretation ultimately determined by the Court of Justice, but references to the Court can very often be slow, time-consuming affairs. In the interim there would be no certainty.
  • Is it wanted? Parallels are sometimes drawn between the optional instrument and the UN Convention on the International Sale of Goods, which provides an optional system for international sale contracts. Yet the latter is far less used than several national systems and similar issues may arise with any optional instrument. The Which? response to the green paper highlighted that there appeared to be little appetite for the optional instrument amongst consumers, although there appears to be somewhat greater support for the idea amongst small and medium-sized enterprises (SMEs).
  • Who would choose it? In order to make an informed choice, a party would have to be sufficiently familiar with both its own legal system and the optional instrument and the advantages and disadvantages of each for each transaction into which it enters. In the vast majority of cases, it is hard to see that being the case.
  • Will you have to pay for it? Contract involves, amongst other things, the transfer of risk from one party to another. Different legal systems permit greater or lesser degrees of risk transfer. Take an example: Directive 93/13 on unfair terms in consumer contracts contains a list of terms that are indicatively unfair; they must be justified by the non-consumer party if it wishes to rely on them. Certain of those terms – such as penalties – are simply prohibited in English law. Assume the optional instrument follows the Directive: it may permit, in the case of penalties, more onerous terms to be imposed than would English law. Should the price of whatever is being sold be reduced to reflect that? And if the optional instrument offers better protections, could the price be increased?

All this gives rise to uncertainty, both at present as we wait to see what form any proposed instrument might take and, should it be implemented, how it will be interpreted. The Commission has repeatedly stressed the need for any optional instrument to offer a high level of legal certainty without, at this stage, saying how that will be achieved.

Where do we go from here?

The expert group report was published on 3 May and will be open for comment until 1 July; it will be followed by the impact assessment, a Commission review and, finally, a legislative proposal some time in the autumn. These will be important matters to follow. Particularly key will be the question of how optional any instrument really is, since that will be central in assessing what difference it will make to clients.

The recitals to Rome I acknowledge the possibility of an optional instrument but provides merely "such instrument may provide that the parties may choose to apply those rules." That may suggest that the optional instrument itself will set out when it will apply, and indeed in a purely domestic context (for example, where both parties are English), in the absence of an express choice of law by the parties the tests in Rome I are not well suited to decide whether domestic law or the optional instrument should apply.

The question then turns to whether the approach should be opt-in, where the parties must expressly select the instrument, or opt-out, where they must expressly choose national law. The former would have a limited impact, but that may be seen as its weakness: realistically, consumers and SMEs may either not have sufficient information or not have sufficient bargaining power to be able to determine when to opt in and to enforce that decision on their counterparty. The alternative, a presumption in favour of the optional instrument, may not in reality make much difference if the larger party can secure an express opt-out, again either because it is better informed or has more negotiating muscle. Which leaves a final option – no option at all, simply a mandatory requirement, at least in certain classes of contract, to use the instrument. That would be a fundamental change in the way that transactions are conducted for everyone in the EU. It would much more resemble options five and six in the Green Paper, neither of which garnered meaningful support.

A New Rome?

Gaius was generally viewed as a conservative jurist, opposed to innovation. Moreover, when he wrote about the law common to all men he was referring to the law of nations, covering such matters as war, peace, national boundaries and treaties. He accepted that different states might have their own rules of civil law. Whilst the details of the route and, indeed, the destination remain sparse, the Commission seems willing in principle to go much further. If it does, it may fundamentally change the way every EU based party is able to carry on business.

This article first appeared on www.practicallaw.com

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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