Contract killers

The European Commission wants to harmonise contract law across all boundaries. But will this hinder the export of legal services? Jon Robins discovers that many UK lawyers are less than happy with the proposal

“A single European law of contract for a single market” is the latest big idea from Brussels to deal with what the European Commission (EC) calls the problems “resulting from the divergence of national contract laws”.
It is a road down which many UK practitioners would not like to see Brussels go. “Yes, contract law is an issue that businesses must consider when engaging in cross-border deals, but frankly, I doubt it would make it into many of our member's top five list of concerns,” comments Susannah Haan, a legal adviser at the Confederation of British Industry (CBI). “It's really a solution looking for a problem,” she adds.
It is a view that perfectly sums up many of the responses (and pretty much all of the UK ones) published on the EC website. Brussels kicked off the debate on reform of contract law last year with a discussion about the sorts of problems caused by the ragbag of laws throughout Europe.
The EC argued: “Such problems can hinder business and consumers in fully exploiting the potential of the internal market and may mean that they don't have access to the same legal rights and economic chances across borders that community legislation is intended to offer them.”
The EC canvassed views on four options, which can broadly be characterised as: doing nothing; promoting greater convergence through developing common principles; improving existing EC legislation; or – the approach favoured by the EC – adopting new legislation. The European Parliament is reported to be pressing hard for a civil code by 2010 and a green paper is expected by the end of the year.
Unsurprisingly, it is the last option that has been arousing some strong passions throughout the continent. According to a recent EC communication, only a very small minority of respondents favoured the first option compared with considerable support for options two and three. However, a majority – “at least at this stage” – rejected fundamental reform.
As Roger Masefield, a barrister at Brick Court Chambers who co-authored the Bar Council response, puts it: “If option four were to be adopted, one would have seen Chitty on Contract going out of print.” While that might go down well with law students, commercial lawyers are deeply anxious. The Bar Council paper concluded that it would be “a wholly disproportionate and damaging step” to impose a mandatory system of EU contract law on member states.
Given what is potentially at stake, the consultation exercise failed to provoke a huge amount of responses – only some 160 in total. The Law Society dealt with its radical proposals in a cursory three paragraphs, arguing: “The position may cause inconvenience, but in the main it does not cause insuperable difficulties or excessive additional expense.”
Karen Battersby, head of commercial at Eversheds, represented the Law Society at a debate on the topic, which was hosted by the Academy of European Law in Trier, Germany earlier in the year. Her view is that lawyers and the business world have to be convinced that the problems “justify this massive project, which at its extreme would be displacing national laws with a European code”. While the UK practitioner's view might be against a single code of contract, Battersby reports that the European law academics are enthusiasts for wholesale reform and have been for the last two decades.
On the Continent, opinions as to reform are more evenly divided. Battersby was recently instructed by the Council of the Bars and Law Societies of the European Union (CCBE) to work with an Italian law professor to find common ground and come up with a CCBE view. She is a sceptic to the Italian's pro-reform stance.
According to CCBE solicitor-general Jonathan Goldsmith, the council's membership is almost equally split between those for and those against harmonisation. He points to Germany, where the two representative bodies for the legal profession have both taken different views on the issue.
Goldsmith acknowledges that, from a UK perspective, a single law of contract “has always been the worst nightmare”. He adds: “But if you take away national interests and you think about the single market, you can easily see the multiplicity of contract laws, together with the need to take legal advice in different member states, as an obstacle to the pure form of a single market.”
However, Goldsmith believes that to begin to harmonise the disparate systems is indeed a radical step. “But it seems to me that it's a debate worth having, because it's an inevitable next step to a single market,” he says. “Never mind about federalisation and a single European superstate.”
It is an emotive issue for the UK legal profession, not least because harmonisation could signal the demise of English law as the preferred jurisdiction in contract matters. In the words of the Bar Council, it would “destroy a significant invisible export of the EU” because international legal business would be lost to the US. The Bar Council pointed to the Cap Gemini report, commissioned by the Lord Chancellor's Department, which estimated that in the region of £800m in invisible earnings comes to the UK through international litigation conducted in its courts.
“Effectively we would be jeopardising quite a large legal export, not just from the UK, but also from Europe as a whole, because our real competitor jurisdiction is the US,” argues Masefield at Brick Court. “The real risk is that, if we adopted a single market system of law, we'd see a move away from the international business community to the US as a favoured choice of law,” he says. If it is an argument of self-interest, Masefield points out that there is also little or no empirical evidence to suggest that disparate systems damage cross-border trade anyway. Such an exercise could fall foul of the principle of subsidiarity and proportionality, the barrister claims.
Certainly, disparate state laws in the US do not appear to have done the Americans any harm. “The US has a very effective single market and yet every state has its own law,” points out Andrew Shindler, a partner at SJ Berwin who has been following the debate. “The general principles of contract law might vary from state to state, but it doesn't stop a company in Arkansas dealing with a company in Louisiana. There are much bigger barriers such as language and culture.”
Similarly, Shindler argues that the UK doctrine of consideration in contract law does not prevent trade with France. “Two businesses are free to choose their law and their courts, and if they don't do so there are rules to determine which ones apply,” he points out. The Bar Council also expresses concern that any mandatory system would interfere with parties' freedom to contract.
The task of framing a Europewide code of conduct would, of course, be Herculean in scale. How long would it take the policymakers to finish the job? wonders Jane Pittaway, head of international at Wragge & Co. As the CBI's Haan says, such a mission would be “an excessive ambition”.
Pittaway is also concerned with how a single law of contract would reconcile a Continental civil code with the UK's common law. The objective of harmonisation might be “highly commendable”, she reckons, “but when you get down to the actual practicalities it's a different story, because you'd end up drafting by committee with lawyers with different cultures, languages and countries coming together. It would tend to end up with the lowest common denominator.”
Michael Patchett-Joyce of Monckton Chambers, who co-wrote the Commercial Bar Association's (Combar) response to the consultation exercise, takes issue with the way the debate has been presented by the EC. “The word 'option' is something of a misnomer,” he argues. The way forward does not require selecting one option over another, the barrister explains; instead, Combar favours the gently-gently approach of options two and three, and a “pragmatic, incremental approach” to the development of European contract law.
For many business-to-business transactions there can be few problems raised by the present disparate collection of legal systems, says Patchett-Joyce. This is because the inclusion of a choice of law clause is a common practice among businesses, which in effect surmounts the problem.
There is no reason to believe why two transnational concerns of equal size and with equality of arms should not be capable of deciding where to contract, he continues. “But then there is a problem where one of the businesses is a small to medium enterprise and the other is a global concern.” But, as the barrister points out, the laissez faire model of the first option does not mean “pickling everything in aspic”. “It means letting market forces have free rein; and out of that there will develop standard forms of contract through mutual alliances between trade associations or European trade associations,” he says.
It is the consumer transactions where there are greater fears of the inequality of arms between contracting parties. Individual directives in areas such as consumer credit, sale of goods and package holidays have addressed perceived problems in the past and already achieved a degree of harmonisation. But, as Shindler points out, there is still a disparity between member states with, for example, cooling-off periods for goods bought over the internet varying from seven working days in the UK to 21 days elsewhere.
Shindler hopes that any future action from the EC will be focused on the consumer, mainly with industry-specific problems being addressed when they arise, and that they should “not be too doctrinaire about the European ideal”.
He is surprised that the debate has not engendered more interest. Perhaps lawyers fail to perceive the threat of option four as a realistic proposition, he surmises. “But it's an important debate, because if by default through a lack of response we ended up with some EC law, that could well be disastrous,” he warns.

Exporting UK legal services
Baroness Scotland QC, the minister responsible for international legal policy, was in Bulgaria last week, flying the flag for City lawyers as part of the Lord Chancellor Lord Irvine 's ongoing campaign to promote UK legal services abroad.
It has been two years since Irvine shocked private practice and pledged at the annual judges' dinner at Mansion House to promote UK legal services abroad. Since then the Lord Chancellor's Department (LCD) has been active throughout the world and on the Continent. Earlier in the year Scotland was shaking hands with Polish dignitaries, and before Christmas she visited Slovakia as part of her on-off tour to open up hitherto closed doors to UK lawyers.
“Government can, on occasion, do things that private enterprises cannot,” Irvine told the judiciary. “Political influence on a bilateral basis can be invaluable – and trade negotiations can open up markets. As a provider and purchaser of legal services, and as a sponsor and a regulator of the market, government has a fundamental role, whether acting to deregulate the market internally, reducing costly restrictive practices or promoting its interests on the international stage.”
There was considerable surprise that the Lord Chancellor should have wrested such a role from the Department of Trade and Industry in the first place. As one lawyer puts it: “We thought he only had eyes for the Bar.” Nevertheless, his motivation was clear. As he acknowledged in his speech, foreign earnings by UK law firms were conservatively estimated at £1.5bn.
But City lawyers were also wary of how the civil servants would work alongside their Law Society counterparts, who had been making forays on behalf of their members for 20 years. There was talk of turf wars.
But according to one insider, there have been “no serious problems” and “lots of enthusiasm” from Irvine over the last two years. Robin Healey, a consultant with Ince & Co and the member of the Law Society Council who deals with international issues, believes that having a minister on the ground can make the difference in talks. “You need every weapon in the armoury,” he says. “It gets the message into the top political circles of these countries and we don't have to lobby through the local bar, which is often resistant.”
Healey reckons that ministers can open doors, particularly in the context of World Trade Organization (WTO) and General Agreement on Tariffs and Trade (Gatt) talks. One City lawyer is less impressed with having Scotland, who does not have a commercial legal background, fighting the corner of City lawyers.
But the LCD seems to have taken its new role seriously. In last year's Mansion House speech, the Lord Chancellor developed its “market strategy”, including the International Legal Services Forum, chaired by Judge Toulmin. According to Irvine, the group would “provide a vehicle for the professions, their customers and the Government to promote British legal services abroad and attract legal business to the UK”. This year the LCD appointed what has been called a “Gatt ambassador” to steer ministers through negotiations.
Jonathan Goldsmith, solicitor-general of the Council of the Bars and Law Societies of the European Union and former head of the Law Society's international group, believes this is an important development. “The LCD is unique in the world in that it is a Ministry of Justice that has taken on someone to look at Gatt and legal services. It's highly commendable and we, in time, will feel the benefit.”