In harmony’s way

Jonathan Harris points out the potential pitfalls that EU harmonisation could foist upon UK practitioners in commercial litigation

The bandwagon of the European harmonisation of commercial law rolls on, sweeping away national laws in its path. The justifications for this, ­however, must be articulated carefully, especially where such a move upsets established national rules that operate well in practice.

The UK opted in to the revision of ­Council Regulation (EC) No 44/2001 (the ­Judgments Regulation), which governs the jurisdiction and enforcement of foreign judgments further to the European ­Commission proposal of 14 December 2010.

The proposal contains much that will improve UK law. It strengthens protection for exclusive jurisdiction clauses so that no other courts shall have jurisdiction unless and until the designated court declines ­jurisdiction.

It also improves coordination between court and arbitral proceedings, provided that where the designated seat of arbitration is in an EU member state, the courts of a member state must stay their proceedings once the courts of the seat of arbitration or the arbitral tribunal have been seised of proceedings to determine the validity of the arbitration agreement.

Wide angle

Not all initiatives will have a welcome effect on UK law. Arguably the Commission’s most controversial proposal is to extend ­harmonised jurisdiction rules to defendants domiciled outside the EU. This would ­effectively sound the death knell
for ­common law rules of jurisdiction in the area of commercial litigation.

The MoJ has questioned the internal market justification for this. It will largely compel English courts to assert jurisdiction over non-EU defendants if a relevant basis of jurisdiction is established. Hence an ­English court may lack jurisdiction over a contract governed by English law that is to be performed overseas.

In tort claims a party may litigate in England solely in respect of damage occurring here, even if most of the damage occurred elsewhere. The Commission proposes a limited discretionary power to stay where there are prior parallel proceedings in a non-member state. Otherwise forum shopping could not henceforth be controlled in England by the forum non conveniens doctrine.

The ultimate way of eliminating ­differences between legal systems is to harmonise their substantive laws. On 11 October the Commission published its proposal for a Common European Sales Law (CESL). This instrument will apply, at the parties’ election, to cross-border contracts of sales of goods and digital content where at least one party is established in a member state. It contains rules on business-to-business (B2B) and business-to-consumer transactions.

The basic idea of the CESL is attractive. Currently, under the Rome I Regulation on choice of law in contract, a UK business that directs activities to another member state must comply with the consumer ­protection rules of that state. For cross-border traders, particularly those contracting online, this could result in the application of numerous consumer protection rules.

As the Law Commission points out, ­however, the CESL is complex and may be unclear to consumers. For traders it results in different legal rules for domestic and cross-border sales, although states may extend the CESL to domestic sales.

The EU Consumer Sales Directive already provides minimum remedies for faulty goods and is supplemented in the UK by the consumer’s right to reject the goods within a reasonable time. The Law Commission’s 2009 report on remedies for faulty goods suggested that the right should be limited to 30 days after sale.

Wrong timing

The CESL gives the consumer the right to reject within two years of when they could reasonably have discovered the fault. The Law Commission notes that this may ­discourage traders from using the CESL.

The European Commission also states that the CESL offers consumers a free choice of remedies in case they buy a ­defective product – even several months after ­purchase. This means that consumers could terminate the contract, ask for a replacement, a repair or a price reduction. Today such a free choice of remedy exists in five EU countries – France, Greece, ­Lithuania, Luxembourg and Portugal. This, however, presupposes that UK law is ­deficient in failing to offer such remedies.

For B2B contracts, the need for EU ­harmonised sales rules is not immediately apparent. The Vienna Convention on ­International Sales of Goods ­dominates the worldwide landscape. The UK, however, has not elected to ratify the convention and has chosen to preserve its national law.

The emphasis placed by the CESL on good faith, fair dealing and discretionary remedies fits uneasily into UK law. ­Moreover, ­precisely because the CESL offers greater protection to weaker parties, the Law Commission notes that “those who would most benefit from it are the least likely to use it. Where a weaker party contracts with a stronger party, the choice of law is likely to be dictated by the stronger party.”

Clearly there is no stemming the tide of EU harmonisation. European regulations, however, tend to have a distinctly civilian flavour, which can sometimes sit uneasily with UK law. This can cause disquiet where the rationale for ousting national law is not apparent.

Jonathan Harris is a barrister at Serle Court