UK: Does Business Want an EU contract law? The Clifford Chance Survey

Last Updated: 16 May 2005
Article by Simon James and Hilary Plattern

Clifford Chance’s survey of 175 businesses across eight countries in the European Union has revealed that some two-thirds of those businesses consider that there are still obstacles to cross-border trade within the EU. Over four-fifths of businesses would welcome an EU contract law to help overcome those obstacles – but only if it is optional. The same proportion of businesses regard it as important to be able to choose the governing law of their contracts.

Background

Movements devoted to harmonising law between countries are not new. For example, in 1926 the International Institute for the Unification of Private Law (Unidroit) was set up, originally under the aegis of the League of Nations but now as an independent intergovernmental organisation with its own statute. In 1994, it published its Principles of International Commercial Contracts, which it updated ten years later.

In 1989, the European Parliament passed the first of a series of resolutions calling for the harmonisation of civil law across the European Union on the basis that it was necessary for the proper functioning of the internal market. In 1999, the Tampere European Council requested a study on the need to harmonise civil law, and the European Commission responded with a consultation paper on contract law. This was followed by an "action plan" in 2003, and a "way forward" in 2004. These indicate that the Commission’s primary focus is on improving the EU’s current legislation affecting contract law (the acquis), but that the Commission will also consider whether there should be an optional instrument setting out a European contract law.

To assist it in improving the acquis, the Commission is in the process of appointing the Study Group on a European Civil Code to prepare a "common frame of reference" (CFR), "establishing common principles and terminology in the area of European contract law". It will not be confined to areas covered by the current acquis, but will range across the whole of contract law and associated areas (indeed, from 1995 to 2000, a precursor of the Study Group produced a set of "Principles of European Contract Law").

The Commission will also use the CFR to assist it in its deliberations on the possibility of a European contract law. A CFR is not necessarily identical to an EU code, but it is clearly a close relative and could, with political will, evolve into a code. The CFR, and the debate it brings to the fore, is therefore potentially of great long term importance.

The argument behind demands for a European civil code and, more specifically, a European contract law, is that different national contract laws obstruct the internal market. But is this so? Little research has been done to establish whether the users of contract law find different national laws an obstruction and, if so, whether they consider that a European contract law would help. Contract law exists for the benefit of those who make bargains every day to secure their commercial and personal needs. Consumers certainly, but also the businesses big and small across Europe that generate society’s wealth. These businesses need an efficient contract law to enable them to carry on trade productively and securely. The only way to find out whether these businesses consider that a European contract law would help is to ask them. That is what the Clifford Chance Survey did.

Methodology

The Survey asked 175 companies across Europe what they thought about various issues related to a European contract law. These companies were spread over eight countries (France, Germany, Hungary, Italy, the Netherlands, Poland, Spain and the UK*), representing larger and smaller economies within the EU, new members and old, and those with a reputation for enthusiasm for the EU and those considered more sceptical.

The companies themselves were large and small (19.4% were SMEs), household names and the less well known. They came from a range of industries*. 66% of the individuals interviewed worked within the legal function of their companies and, as such, are responsible for ensuring that the law serves their companies in the best way. The rest were directors, company secretaries, vice presidents and similar.

The survey was prepared in collaboration with the Institute of European and Comparative Law in the University of Oxford and was conducted by an independent firm, Gracechurch Consulting. Gracechurch arranged the interviews with participants, most of which took place in late January and February 2005. The interviews were conducted over the telephone in the participant’s native language.

Are there obstacles to trade within the EU?

Participants were asked to what extent obstacles to trade existed between EU member states. 65% said that they did experience obstacles, either to some extent or to a large extent*. The figure was not significantly different for SMEs (68%). Of that 65%, only 14% said that they experienced large obstacles. 10% said that they experienced no obstacles at all, and 22% said that they did not really experience obstacles.

The picture, therefore, is of obstacles, but not major obstacles. This is born out by the effect of those obstacles. Of those who considered that there were obstacles of some sort, only 28% said that they were sometimes or often deterred from crossborder trade by the obstacles or their financial impact*. Taking into account those who thought that there were no obstacles, the overall number of those for whom these obstacles constitute a significant deterrent drops to 25%.

Table 1: To what extent do obstacles to cross-border trade exist between EU member states?

To some extent

51%

Not really

22%

To a large extent

14%

Not at all

10%

Don't know

3%

Though these obstacles have limited deterrent effect on crossborder trade, 62% of those who considered that there were obstacles also said that they had some or a large financial impact*. Only 35% of this group said that the obstacles had no impact or a minimal financial impact. If, however, those who thought there were no obstacles to cross-border trade are included, the proportion of those for whom obstacles have little or no financial effect rises to 40% of all the companies in the survey.

Participants who considered that there were obstacles to trade within the EU were also asked whether EU directives and legislation had affected cross-border trade and, in particular, whether they had reduced obstacles, increased them or made no difference. 59% said that the EU had reduced obstacles, 8% said it had increased them, and 29% said that the EU had made no difference*. There were national differences in this. For example, in the UK and Poland, only 34% and 36% respectively considered that the EU had reduced obstacles to cross-border trade, but in Hungary and Italy the figures were 88% and 80%. The figure for SMEs was 41%, a little lower than the overall figure.

What are the obstacles?

Participants who considered that there were obstacles to trade within the EU were asked to rate seven factors that might affect cross-border trade within the EU on a scale of one to ten, where one represented no impact and ten represented a high impact. The results are in Table 2. 

Table 2 How do the following factors impact on your ability to conduct cross-border transactions? 
(1 = no impact, 10 = high impact)

Factor

Average

Language

4.05

Cultural differences

4.37

Bureaucracy/corruption

4.53

Different implementation of EU law

5.04

Cost of foreign legal advice

5.16

Variation in legal systems

5.35

Tax

5.64

The results for all seven factors are fairly tightly grouped at or just below the central point, with no one factor apparently much more significant than any other. However, the softer factors (eg language and culture) seem to have less impact than harder-edged factors, such as tax and the cost of foreign legal advice.

Nevertheless, it is clear that the cost of obtaining foreign legal advice and differences between legal systems are factors that affect cross-border trade, even if they score only marginally higher than differences in the implementation of EU law between member states.

Would an EU contract law help?

All participants in the survey were asked how favourably they viewed the prospect of a harmonised European contract law. More than four-fifths viewed the prospect favourably or very favourably*. This favourable attitude to a possible European contract law applies across all industries and countries. Only the UK is significantly less enthusiastic than other countries but, even there, 63% viewed the prospect of a European contract law either favourably or very favourably. The UK also had significantly the highest proportion of opponents, with 20% viewing it not at all favourably and another 10% not very favourably (the highest figure in any other country for those viewing the prospect not at all favourably was Poland, at 7%). Amongst industries, the professional and other services sector shows a similar level of enthusiasm as the UK, markedly lower than other areas.

What is more, not only do over four-fifths view favourably the prospect of a European contract law, almost exactly the same proportion said that they would be likely or very likely to use it, though with the UK considerably less likely than other countries*.

At present, an EU convention, the Rome Convention, enshrines the principle that contracting parties can choose the law governing their contract, a choice that extends beyond the boundaries of the EU. It is not unusual to treat a proposal that the other party’s home law should govern a transaction with a degree of suspicion (whether or not accompanied by a choice of the courts of that state), often simply because of lack of familiarity. A "neutral" law, such as an EU law, might offer a satisfactory compromise for trade within the EU, avoiding the need to choose the law of a third country and, perhaps, to instruct additional lawyers in that country. However, since a European contract law does not yet exist, this enthusiasm is currently theoretical, and will inevitably be affected by the quality of the law and, in particular, whether it meets the needs of business. This may have contributed to the degree of scepticism as to whether the creation of an EU contract law was achievable*.

It is also clear that business wants to retain the ability to choose from different laws. 83% said that it was important to be able to choose the governing law*. But when asked whether the ability to choose from different contract laws across Europe was an advantage, the number answering positively fell to 61%*. Further, when asked whether they would choose a law outside Europe if no European law was suitable, 41% said that they would do so*. This suggests that while a significant degree of arbitrage between legal systems does take place, the choice of law is also often dictated by the need to compromise rather than because a law is in fact unsuitable for the particular transaction.

Business does not want a mandatory EU contract law. When offered a choice between a mandatory EU law replacing national laws, the uniform implementation of EU law, and an EU law in addition to national laws, only 30% opted for an EU law replacing national laws, with more (38%) preferring the uniform implementation of EU law*. Similarly, when asked whether a European contract law established in addition to national laws should be mandatory for cross-border transactions, only 20% thought that it should be. A large majority preferred it to be optional, whether for cross-border transactions or for all transactions, with a fairly even split between those who wanted an opt in or an opt out system*.

Participants were also asked how important they felt certain factors were in developing good contract law. Fairness, predictability and enabling trade were all regarded as important, with prescription and flexibility less so*. Business wants to know where it stands legally.

Current choice of law

Participants were asked about their current practices in choosing the law to govern a contract. When asked what their preferred choice of law was, two-thirds unsurprisingly opted for their home law. However, the proportion that did so varied considerably between different countries. In the UK, it was 97%, in France 73%, in Germany 63%, and in the Netherlands only 43%*. The reasons for this can only be speculation, but both the Netherlands and Germany have recently undertaken significant changes to their contractual codes.

Participants were also asked what was the most used law when conducting cross-border trade. There was a wide range of choices, but UK law (for these purposes, probably synonymous with English law) was much the most used, at 26%*. No other single country scored more than 11% (France). If, however, those who said that the most used law was their home law are excluded, the figure for the use of UK law stays the same, but the second most highly used becomes German law, at 6%*; and if those who said they didn’t know or refused to answer are excluded, the figure for the use of UK law rises to 49%. US law scored only 5% on this basis. Overall, there was, however, a relatively high number of respondents to this question who either didn’t know (18%) or who refused to answer (4%). 

Finally, participants were asked the extent to which they chose a foreign law because the local law was not suitable to achieve their aims. 43% said that they often or occasionally did so*, almost mirroring the number who said that they would use a non-European law if no European law was suitable.

Conclusion

The conclusion from the Clifford Chance Survey is that business wants the European Commission to continue its deliberations on an optional instrument. Business in the EU is very interested in a neutral, EU contract law, and would be likely to use it. But this does, of course, depend upon it being a good law that enables trade and gives business the predictability it needs.

There is also concern amongst businesses at the differences in the interpretation and implementation of existing EU law. The Commission should be taking measures to improve this, the measures needed being less ambitious in scope than those needed to prepare an EU contract law. Improving existing EU law should not await the deliberations on an optional instrument.

Footnotes

*Full report, including appendix with complete tables, is available at http://www.cliffordchance.com/expertise/publications/details.aspx?FilterName=@URL&contentitemid=8354

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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