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Alternative To National Law: Good Idea Or Bad?

August 28, 2010

At an EU session I attended earlier this year, officials indicated that there would be a proposal to offer businesses trading across borders within the European Community the opportunity to agree to the use of a ‘neutral’ EU set of laws, as an alternative to the normal debate over which national law would apply.

That proposal has now been formally released for discussion.

In principle, this seems a good idea. I think that IACCM should definitely take a position and potentially include in our considerations input from outside the EU. For example, many of our corporate members operate through subsidiaries in Europe and this should in principle offer them significant simplification. However, some might see it as the thin end of the wedge; if they espouse this principle for trade within the EU, why wouldn’t that be seen as endorsing further steps towards more standards – for example, perhaps a convergent agreement that also embraced NAFTA countries or the ASEAN trade block? But many of our members might in fact welcome this potential for growing convergence of legal systems – or at least, an acceptance that organizations trading across borders will have a better structured alternative which equalizes risks.

Until now, most corporate lawyers have steadfastly resisted any move towards supra-national business contracts. The UNCISG has been in place for many years and is almost universally written out from most corporate contracts. In my experience this has more to do with lack of familiarity (and absence of extensive case law) than because it is intrinsically bad. So will this opportunity meet a similar fate, even though it might have significant benefits on business costs and efficiency. The record of the law – and the contracts community as a whole – is not especially positive when it comes to efficiency initiatives. So how will this project fare?

 Certainly there are key questions that must be answered and concerns that will need to be addressed. For example, how will such a body of laws be constructed and what principles will govern their drafting? How and by whom will adjudication of disputes or litigation be managed? But at this point the question is one of principle – is this in itself a good and beneficial idea?

You can read the call for inputs and the background to the proposal at http://www.justice.gov.uk/news/newsrelease180810a.htm. Please make your comments below.

11 Comments
  1. Kim Kasprzycki permalink

    I think the principle is a good one for the EU. The EU has already standardized other initiatives for trade, such as CE and RoHS. These are industry or product type standards, but I think the same principle applies. Also, one of the reasons the EU was united was for regional integration. This seems another step in that integration.

  2. Extract from the Original Posting on the LI Group – CIPS Opinion Panel
    Posted by Emma Scott – Representation Manager CIPS
    The extract is from out-law.com © Pinsent Masons solicitors

    The Commission Green Paper explains the seven kinds of new system the EU could adopt. These are:
    non-binding model contracts; a ‘toolbox’ for national legislators to use when passing national contract laws to improve consistency;
    a non-binding plea to countries to incorporate a ‘European contract law’ into their laws;
    the creation of an optional ’28th system’ EU contract law to add to the 27 member state legal systems;
    partial harmonisation of contract law through an EU directive;
    full harmonisation of contract law through a Regulation; and
    an EU civil code on contracts which would replace national contract law.
    “This is certainly a time of crisis for Europe’s economy. But it is also a time where we have an historic opportunity to drive economic growth by easing the cost of cross-border transactions,” said Reding. “It is therefore now the time to make a quantum leap towards a more European contract law.”
    A ‘common frame of reference’
    The Green Paper is the work of an expert group convened by the Commission to create a ‘common frame of reference’ on which discussions could be based. The expert group contains three UK-based academics. They are Professor Simon Whittaker of Oxford University, Professor Hugh Beale of Warwick University and Professor Eric Clive of Edinburgh University.
    Reding said earlier this year that she backed the creation of a ’28th system’ of contract law.
    “Business-to-consumer relationships are complicated by 27 different regimes for contractual relations,” she said in February. “That means that a consumer may be able to return a defective product for a full refund within 15 days of the sale in one country, whilst a consumer in another nation may get three months.”
    “Such a European Contract Law would exist in parallel to the national contract laws and provide standard terms and conditions,” she said. “The United States started with a uniform commercial code to become a globally competitive economy. Why couldn’t we have, in the end, a European civil code for our single market?”
    The consultation process is open until 31st January 2011.
    The Green Paper:
    http://ec.europa.eu/justice_home/news/consulting_public/news_consulting_0052_en.htm

    One Response from Susan Singleton – a respected academic and practising solicitor at Singletons

    The problem we have is that our common law (which is similar in US, Australia and many other countries, even Nigeria where I was on business about 2 weeks ago is fundamentally different in the area of contract law from most other EU states which have “civil code” systems. We want to avoid harmonisation with their regimes as much as we can.
    The proposal of a voluntary opt in of an EU contract law which they call the 28th regime would do no harm but I doubt most of us would want to contract on that basis.
    In practice you choose which laws apply (and we have the Rome I regulation in the EU for that) and which courts have jurisdiction (Brussels regulation) which largely in the EU allow parties to contracts to choose which apply and if they fail to choose those regulations determine the matter.
    There has been lots of harmonisation to date such as in area like unfair terms in consumer contracts, distance selling, trademarks law, commercial agency law, unfair marketing but the fundamentals of contract law are very different in other countries from the UK so we’d inevitably suffer from any out and out harmonisation.

    I would comment:

    A debate had started for this posting but ceased when Susan posted because I would guess, and I on my part because I believe, it is a most cogent post. However, it address the issue primarily from a UK (English Law – noting Scottish law differs) perspective.
    Noting that the proposed Directive seems to be aimed at SMEs and consumers but Reding states:”Business-to-consumer relationships are complicated by 27 different regimes for contractual relations ….. That means that a consumer may be able to return a defective product for a full refund within 15 days of the sale in one country, whilst a consumer in another nation may get three months.”
    So is it consumer law or business law to apply to SMEs. She also states:
    “It is therefore now the time to make a quantum leap towards a more European contract law.”
    So, is this a statement of intent or wish in respect of further expansion of the supra legal European State. Note that she also compares the EU to the USA and comments: “Why couldn’t we have, in the end, a European civil code for our single market?”
    Only time will tell whether this will succeed but note the desire for a “civil code” – being parochial would we in England want this? Further, I believe the English Commercial courts are still a major export earner and any move to an EU Civil Code could well damage this.
    I doubt the premise espoused by Reding is simply one of offering the choice of law – this goes against the track record of most EU Directives. In any event we already have a choice of laws

    Susan comments:
    “In practice you choose which laws apply (and we have the Rome I regulation in the EU for that) and which courts have jurisdiction (Brussels regulation) which largely in the EU allow parties to contracts to choose which apply and if they fail to choose those regulations determine the matter.”

    So giving us another choice does not simplify matters any further for major corporate deals. Also, as a B2C business if I had this choice I would chose the law of the EU Member State which best suits my commercial needs regardless of the consumer protection offered in the consumer’s home state – probably my home state because I know the laws. What power would a consumer have to object to this, would the English Unfair Contract Terms Act be able to invoked for English Consumers – who knows.
    So from this you will gather at the moment I would reject this in principle and more to the point the concept of an “offer” in this context is, I believe, mere window dressing to enable further extension of EU Commission powers

    • Thanks for this lengthy and helpful comment. I think a couple of related, but separate, issues are perhaps getting confused here. One is the general question of giving parties and option to choose a ‘neutral’ forum. I do not immediately see why or how that expansion of choice in any way undermines the freedom of the parties to negotiate. The second question is that of dispute resolution mechanisms for low value claims – in many cases consumer claims. I have written separately on that issue in past blogs, having chaired one of the recent sessions at the UNCITRAL conference at which a global solution was debated. On this matter, UNCITRAL has in fact agrred to adopt the project to explore a worldwide answer to a very real problem. Whatever the lawyers may feel about dispute resolution, the fact is that the real world is finidng solutions. Today, Paypal is the most commonly used dispute resolution mechanism for low value claims – surpassing by far any alternative methods. That is because national legal systems cannot address the needs of the consumer when conducting international commerce. The US State Department / NAFTA have advocated one position; the EU has a similar, but different, approach. Clearly, it is in everyone’s interests that in the area of consumer protection in international trade, we reach a global consensus – and in that context, I agree that the EU’s ’28th system’ is largely unhelpful.

  3. Maria H. permalink

    I believe it would be beneficial, not only for EU companies but also for US Companies with subsidiaries in European territories. It would offer unlimited advantages in the contracting arena. If the set of laws are well written, and if these are optional (chose this body of law vs. the laws of a specific country) then we could be avoiding issues such as enforceability of specific language in a specific country (i.e. penalties not enforceable in UK law, thus the need to refer to them as liquidated damages, and other verbiage issues), interpretation, or things as simple as “assignments” that may or may not have an exact “counterpart” in the legislation of different countries. Very positive outlook… we shall see..

  4. Peter Mallett permalink

    This is of course not a new idea. India has its contracting code (I don’t recall the actual title) by which it conducts business. Likewise England and Wales has the Sale of Goods Act. The difference here is the attempt by the EU to place an umbrella over the Member States. It tends to run against the principles of the Treaty and therefore in my opinion is quite a major step change.

    As I understand the European Union Law (EU) it stems from the Articles of the Treaty (originally Rome) and now the Reform Treaty. Those articles are the code by which Member States are required to act in connection with, among other things, free movement of goods and people, trade (competiton) etc. Those Articles are then reinforced by Directives, Regulations and of course Judgments from the ECJ (or the Court of First Instance in competion law cases).

    Having produced the Article, Directives or Regulations, the EU requires Member States to enact those laws nationally becuase the EU recognises differing methods of law making in the various Member States. In England and Wales these laws are passed on to the statute by way of an Act of Parliament.

    The point is, if we were to produce such a neutral contract, it would need to be able to cope with these various statutes/laws. In other words EU law is not an homogenous entity that in and of itself, governs the actions of individuals (businesses or people) by direct effect. I realise there are a few exceptions.

    Another consideration is that of cross border projects, such as pipelines. These may well cross from non EU countries into EU countries. And, lest we forget, FIDIC and similar contracts already exist for the purposes of fitting in with different legal regimes.

    At face value I can see no real advantages for this from a contracting viewpoint. Any neutral contract will necessarily need to comply with the laws of the country in which it is being carried out. Thus it may be argued that using English law is as good as any, and may be better simply because it is extremely flexible and is an internationally recogised basis for business agreements.

    • Peter, I guess the envisaged benefit is similar to that which was envisagewd in the United States when they established federal laws (the UCC) as an alternative to individual state laws (which created cross-border costs and risks similar to those faced by forms within Europe. As someone familiar with English law, I share your view about its adequacy. But I also appreciate that if I was a citizen of France, or Greece or Hungary, then I would have a rather different view. The issue is that national laws always tend to confer an advantage on the party resident in that country – whether it be through familiarity, contacts or simply confidence in how the system works. I guess those who feel this is not important shoudl also be comfortable with contracting under the laws of their counter-party. If you are not, then I guess you have answered your own question about the advantages.

      Having said that, there are also evident challenges – such as the principles on which such laws will be drawn up, the methods for dispute resolution, the extent of inter-dependedncy with traditional, national courts of law etc.

  5. Peter Mallett permalink

    Agreed there are precedents to the interstate/boundary issue. Likewise I agree that the use of an alternative country’s law is always a bone of contention when working in another state.

    That said in my experience the main issues relate to approach not the law in itself. Let’s not forget that the law only comes into play when settling a dispute. If the agreement is operated correctly the law never gets a look in.

    But the big problem I see here is that to which I referred previously. The proposal is counter to the principles of the EU in terms of sovereignty and therefore brings the Articles of the Treaty into direct effect, which again is not what they were designed to achieve.

  6. Mary M. Reynaud permalink

    The current regulations or contract law for the EU is a problem when dealing with service provider(s) in multiple countries. Currently, we only accept agreements with US governing law and language.

    Graining concourance standard agreements does not have to happen all at once and could be adressed one provision at a time. For example, standardizing the privacy provision for EU countries may be a good starting place if the majority of EU countries follow the same basic standards.

    An automated solution could provide an effective method for creating standardization, by starting presenting a basic template and allowing the user to select a specific country to view recommended, possibly highlighed, changes to the agreement for that country.

  7. Sade permalink

    while this seems laudable the crux for me is
    i.how fairly the principles governing the drafting of the laws will be.
    ii. what happens with cross border transactions

    Though there might be some advantage to having a standard law in place in the EU for contracting, for one it would save contracting parties where both parties are in the EU and where its applicable, the burden of determining the applicable laws to a transaction due to the divergent contract laws operating in various parts of the world. it is prudent in my opinion to take into cognisance the fact that not all parties to contracts are or emanate from the EU. it is not clear what the position would be where a contract is being executed in a country that is not a member of the EU.whose law would/should apply to the contract?

    i know parties are bound to the terms of the agreement as the law that will govern a contract is the law the parties so intend to govern their transaction and this usually is conclusive.

    where the intention of the parties is unclear as to the intended law,the applicable law will be presumed by the courts from the terms of the contract and the surrounding circumstances e.g. the country where the contract was made or where it will be performed.

    it is also a known fact in Nigeria that there are instances where the Nigerian court will throw out the law the parties have agreed to govern the contract. where the courts are convinced that the law chosen to apply to a contract will be contrary to public policy or to mandatory rules of Nigerian law, such a law will not be applied. my concern really is where you have cross border projects as i mentioned earlier and how this is proposed to work given the circumstances.

    • Thanks for these ideas. To clarify, the driver for this initiative is to simplify cross-border trade within the EU and to provide an option (not mandatory requirement) for such contracts to be subject this EU-level jurisdiction.

      • Peter Mallett permalink

        EU-level jurisdiction is perhaps the biggest issue. The ECJ (and/or the Court of First Instance) does not make direct judgements. It has to receive a request from a national court of suitable level such as the Supreme Court (formerly House of Lords) in England and Wales. It then takes that request and provides a judgment that it sends back to the initiating court. If, as with competition law, articles of the treaty have direct effect on individuals (persons or businesses) and the ECJ decides that an article has been breached, it can then recommend that the injured party receives compensation.

        However, any compensation can only be at the level that is defined by the national court applicable to the individual.

        Based on the above it is difficult to see how a pan european set of contract conditions can be enforced unless the institutions of the EU and thus the ECJ are given the power to create laws of the Member States.

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