You heard it here first!
“The train has left the station.” These were the words of Viviane Reding, Vice-President and Commissioner for Justice, Fundamental Rights and Citizenship, spoken at the ECR European Contract Law Hearing held at the European Parliament in Brussels on May 3rd, 2011 (which I attended). This is how the question of whether there will or will not be a pan-EU Contracts Code was answered. The “Commisar” was trying to convey the idea that a political decision has been made and that there indeed will be an EU Contracts Code.
Commissioner Reding did not speak with forked-train. It’s been a slow train coming, but the official proposals have now been made. In words more understandable by American standards, the bill has now (just about a month ago – October 11) been proposed and is in committee.
The proposals, including the draft legislation (code) itself, can be downloaded here:
Here is an alternate link to the EU Sales Law
Among the highlights of the new trans-European code are these:
- It is an opt-in code. This is the reverse of the CISG, which is opt-out.
- It is both Business To Business and Business to Consumer.
- It affects all cross-border trading, including online sales.
- It is applicable to cross-border trading and is not applicable to internal (within-country, national) sales. Thus the regime it imposes is one in which consumers purchasing from a seller within the country the consumer resides in will find their contracts governed as per usual by the national law. But consumers from another EU country, if the contract so states, will find the contract (and their consumer-protection laws) governed by this new opt-in EU UCC (Art. 2) (EU Common Sales Law).
- Supposedly this regime will lower information-costs and enhance, encourage, and expand cross-border trading.
- And my favorite: it contains a facilitative section enabling the new code’s adoption by EU Member States for national (within-border) sales.
The rationale for the code is more or less the standard iteration in defense of such legal regimes (such as the CISG). Here are a few juicy excerpts:
[Regarding B 2 B] In cross-border transactions between traders, parties are not subject to the same restrictions on the applicable law. However, the economic impact of negotiating and applying a foreign law is also high. The costs resulting from dealings with various national laws are burdensome particularly for SME. In their relations with larger companies, SME generally have to agree to apply the law of their business partner and bear the costs of finding out about the content of the foreign law applicable to the contract and of complying with it. In contracts between SME, the need to negotiate the applicable law is a significant obstacle to cross-border trade. For both types of contracts (business-to-business and business-to-consumer) for SME, these additional transaction costs may even be disproportionate to the value of the transaction.
These additional transaction costs grow proportionately to the number of Member States into which a trader exports.
[Regarding B to C] While cross-border shopping could bring substantial economic advantages of more and better offers, the majority of European consumers shop only domestically. One of the important reasons for this situation is that, because of the differences of national laws consumers are often uncertain about their rights in cross-border situations. For example, one of their main concerns is what remedies they have when a product purchased from another Member State is not in conformity with the contract. Many consumers are therefore discouraged to purchase outside their domestic market.
Regarding the quoted justification in the B 2 B context, the Commisioner at the May 3 hearing stated that according to her statistics, the price for a company wanting to sell products through all 27 EU Member States reaches 150,000 euro just for legal fees to ascertain the applicable law.
Me, I doubt it. I am not the only doubting Thomas (or Tadas). Commissioner Reding’s figures were called into question by several members in the audience. Happily, I have a copy of the minutes of the hearing: ECRContractLawminutesFINAL Some of the speakers, all of whom appeared to be either from international law firms or were representatives of various groups and associations, stated that the small businesses in question simply do not view a forced choice of foreign law as an issue. Others questioned the figures given by the Commissioner.
Recent research has suggested that in fact choice of law is not an issue which is dealt with by the majority of businesses engaged in cross-border transactions. The author of one study suggests this is because of lack of sophistication and a view of the law as one in which it is useful only in the case of dispute (as opposed to knowing the dimension of one’s obligations and hence optimizing performance). (See, for example: Gilles Cuniberti, Is the CISG Benefitting Anybody? 39 Vand. J. Transnat’l L. 1511, (Nov.) 2006) (available at SSRN: http://ssrn.com/abstract=1045121 ). Interestingly, Cuniberti is a prof at the U of Luxembourg, the same country the Commissioner is from … I can say from my own practical experience that there is a lot of truth to the idea that these transnational sales regimes don’t achieve what is claimed. If true, this means that SME (Small to Medium Enterprises) will NOT find the new EU Sales Law useful, precisely because it is an opt-in statute. They will not be sufficiently sophisticated or motivated to do so. And yet these are the folks and enterprises which most need the regime (at least arguably, according to its own arguments).
I cannot pass by without mentioning another curiosity. I had not read much about the code being proposed (well, outside of a several-hundred page White Paper on the subject written several years ago). During the May 3 hearing, however, the code was always referred to as such – a contracts code. I assumed, rather naturally, that it was meant to be applied to cross-border service contracts as well. It is not: it is confined solely to the sale of goods. And here I can note the official reason why the CISG is not thought of as being sufficient: four EU countries are not its signatories (England, Portugal, Malta, and Ireland), and it is not ‘sufficiently’ comprehensive.) And as the hearing minutes confirm, ‘all’ of the UK ‘stakeholders’ have come out against the proposed sales law.
For the non-EU reader, it should be explained that the EU is a strange political being. While it is for the most part the Council which passes a law, laws (which the call legal acts) are supposed to be originated in and written by bureaucrats. The bureaucrats are unelected, of course, and are not supposed to be bribed. Supposedly, however, they are to fnd out both what the people want and what is needed. They then write the proposals. The Commissioner is the highest of the high in this process: it is her or his job to ride herd on the matter. Yet it is a kind of runaway state: judging, for instance, from the statements made from the assembled public in the hearing, one would think that the proposal would have been nixed. But the ‘train had left the station.’ Let us hope that this is for the best.
Nevertheless, I cannot refrain from stating my own thoughts as to how the same matter might have been addressed in a more efficient way. Inasmuch as the regime is opt-in, as far as business to business transactions are concerned, it probably would have been at least as efficient for an EU legal act to have the effect that the Unidroit principles of international contracts and other similar soft-law non-statutes (such as the PECL) could be a legitimate choice of law to be applied by national courts (not just arbitration). In regard of the CISG, if necessary, that Convention might have been supplemented by additional provisions, applicable only in B 2 B contracts between EU Member States who were also CISG signatories.
In regard to B 2 C, well, why not, in a spirit of … comity, change the default rule. At present the rule is that the consumer law of the place of residence of the consumer will be applied to the transaction. Why not flip it? I mean, really, if a Lithuanian consumer is placing an order online from a firm in Malta, why should Lithuanian law apply?
But the train has left the station … and so it goes. Let us hope for less than the usual blood on the tracks.