Law to smooth EU trade could face a rough ride

In the half-century since the foundation of the EU, there has been a steady process of harmonisation within the European ­community. In theory, it has become easier to move goods and people around the 27 member states.

However, while customs barriers are now largely absent, the majority of Europe’s businesses prefer to do their trading within national boundaries. Less than 10 per cent of European commerce happens across borders, and this is something the European Commission is determined to change.

Earlier this month (11 October) the Commission published a ­proposal for a common sales law (CSL) - a so-called ’second regime’ designed to sit alongside national laws and encourage cross-border trade. In a first for the EU the ­proposed law is an optional ­instrument. Member states will not have to implement it into national law and nobody will be obliged to use it.

“It’s a bureaucracy breaker rather than a bureaucracy creator,” EU justice commissioner Viviane Reding told journalists in ­Brussels last week.

But the CSL, also described as an EU contract law, has not been welcomed by everyone. It has attracted particular opposition in the UK, with justice secretary Ken Clarke speaking out against it. The Law Society is also lobbying ­heavily in opposition to the law, while consumer groups are opposed despite the Commission pushing the line that the law will enhance consumer protection.

Long story

The debate over European ­contract law is not new. The ­Commission and the European Parliament have been discussing the issue on and off for the best part of a decade, but until Reding was appointed justice commissioner in 2010 very little was ­actually done about it.

Reding, who is generally admired for being the sort of ­person who gets things done, promptly went about setting European wheels in motion. By July 2010, just a few months after her ­appointment, the Commission had published a Green Paper laying out the options for a European sales law.

A six-month consultation ­followed, attracting 319 responses from law firms, bar associations, industry groups, state entities and a handful of large corporations.

The pace at which the law has progressed has surprised and ­concerned some. Members of the European Parliament (MEPs) voted in favour of an optional instrument by a four-fifths ­majority in June and the 115-page proposal was out just four months later - by Brussels standards, ­lightning speed.
Reding wants to pass the ­regulation by 2013, and given current level of support within both the Commission and European Parliament there seems no reason why this should not happen.

Real deal

But she will find herself facing resistance from those who simply cannot see a strong enough ­argument for introducing the law.

“On the face of it, it sounds like a great thing to have a single European contract, but the reality is going to be quite different,” says Allen & Overy (A&O) partner Joanna Page. “People may find themselves contracted to a law that’s quite different from what they now think.”

The Commission estimates that businesses across Europe are ­losing e26bn (£22.6bn) in cross-border trade each year. It carried out a survey suggesting that 55 per cent of companies wanting to sell to consumers in other countries were held back by contract law issues, while 49 per cent of companies in business-to-business transactions said the same.

Cost is also cited as a reason for introducing the law. Figures vary but the minimum estimate is that it costs e10,000 for a company to start selling to an overseas market. This cost is largely attributed to hiring lawyers in each market.

Orrick of counsel Marco ­Dell’Antonia suggests that costs would fall further for clients using the CSL as lawyers would be forced to compete for work with firms in different jurisdictions.

Dirk Staudenmayer, head of the contract law unit at the Commission’s Directorate-General for ­Justice, believes a cost reduction would ultimately be passed down to consumers. Page counters by suggesting that coping with an unfamiliar law could do the ­opposite of cut costs.

“My worry is that in more developing jurisdictions people will end up using this when they don’t truly understand what they’re committing to and that will lead to increased legal bills,” she warns.

Scope for uncertainty

Uncertainty is another key issue for the legal community across Europe. The proposal currently on the table is a mixture of civil and common law. Common law has been included: the concept of good faith is referred to as early as ­Article 2 and reasonableness is also present in the text. But as the proposal is neither wholly ­common law nor wholly civil law, it includes concepts unfamiliar to lawyers across Europe.

To deal with this, the Commission plans to encourage training of lawyers and the judiciary. ­Ultimately, however, member states will bear the cost of this training.

Lost in interpretation

The applicability of the law is another point worrying some. While disputes could go to the European Court of Justice (ECJ), national courts will be expected to handle most litigation. Claims would generally be heard in the country of the consumer and the Commission is planning an online database of judgments accessible to all - indeed, this is part of the proposal.

Critics suggest this database would fail to provide the bedrock of jurisprudence necessary for the law to be applied evenly across all member states.

“From a practical perspective, an optional instrument of contract law would have no underlying jurisprudence and practitioners are concerned that this could lead to uncertainty for businesses and consumers as to how it would be interpreted and applied,” says Law Society president John Wotton. “Even once such a body of case law had been developed, requiring much litigation on the part of ­private parties, it would be difficult to ensure the uniform application of the new system across the 27 EU member states with their ­different legal cultures.”

“In smallish claims judges don’t spend a lot of time looking at this sort of thing,” adds Page. “There’s plenty of scope for uncertainty in the application of the code.”

Joint submissions from alliance firms Herbert Smith and Gleiss Lutz to the Green Paper said sending difficult cases to the ECJ would also be far from straightforward.

“This court is already overburdened and the average length for preliminary ruling cases is ­currently more than 16 months,” the response stated. “Also, its ­current functions are more in the nature of an administrative and constitutional court, and it has neither the resources to deal with,nor the expertise in, civil ­commercial disputes as the final court for the whole of Europe.”

Staudenmayer believes such concerns are unwarranted, ­pointing out that at present few problems arise when, for example, a judge in Lille applies a point of French contract law differently from a judge in Toulouse.

The proposals are also intended to encourage the use of mediation and arbitration, although users run into separate issues with this thanks to the sheer number of alternative dispute resolution mechanisms available across the EU. Harmonisation of these is under consideration, but entirely separately from the contract law proposals.

Protect and serve

Although the law of a contract will be chosen and used by businesses both in business-to-consumer and business-to-business transactions, one of the Commission’s principal arguments for the CSL is that it will improve consumer protection. The law will give consumers ­various options in the case of contractual terms not being met - having goods repaired or replaced, or the price reduced or refunded.

At present some EU member states, predominantly newer entrants in the east, do not give their citizens this level of ­protection. Others do.

The Commission argues that the law provides a high enough level of consumer protection, but ­consumer groups counter by ­suggesting businesses will choose the option with the lowest level of ­protection.

“If the final version has a high level of consumer protection ­businesses won’t use it,” argues Jill Johnstone, director of international policy and advocacy for UK group Consumer Focus.

She adds that if the final ­version ends up protecting consumers less than under national law, ­businesses will go for that.

Precisely how many businesses would choose the CSL is very much an unknown. The Commission survey found that 71 per cent of EU companies said they would be very likely or likely to use it for transactions with consumers. A similar number, 70 per cent, said they might choose it for business-to-business deals.

The proportion of companies supporting the proposal varies widely across member states, from less than 50 per cent in the UK to more than 80 per cent in Slovenia. At present it seems likely that most of those who eventually plump for the law will be smaller companies.

Telecoms giant Nokia is ­presented by the Commission as a company that might use the law, but it is reluctant to comment until more details are available. In its response to the Green Paper the company welcomed the Commission’s efforts to “address the ­obstacles of the internal market” in business-to-consumer transactions, but suggested that combining ­business-to-consumer and business-to-business contracts in a single instrument would be unwieldy.

Large law firms tend to think their clients would not choose the CSL over tried-and-tested ­national laws. Of course, until the regulation is in place, the level of take-up cannot be known.

Graham Wynn, assistant director for regulatory and consumer affairs for the British Retail Consortium, which broadly supports the proposal, suggests a large number of the association’s members could choose to use the law “if it’s practical and proportionate”.

Form and function

The other criticism of the proposal is connected to the process and form of the CSL. By introducing an optional instrument for such a law the justice directorate is ­venturing into unknown territory.

“It’s a first in the legal history of the EU,” says Reding. “We’re choosing a way that’s never been chosen before.”

She argues that because nobody will be forced to use the law there is no harm in introducing it.

But some are worried that an optional instrument is merely the first step towards attempting to bring in a mandatory law across the EU.

“The main concern that we have is really the ’thin end of the wedge’ argument: that what might be optional today could be ­mandatory in the future,” says Alasdair Douglas, chair of the City of ­London Law Society.

The impact of a single European contract law, superseding national laws, would not only affect the UK but also the Continent, Douglas and others argue.

“English law isn’t really competing against German or Italian or French law when it comes to real international deliverable trade - we’re competing against New York law,” Douglas points out.

He suggests that if a single European sales law were to become obligatory in the future many businesses would choose New York law - with its ­established body of jurisprudence - over the European version.

Consumer groups have also expressed worries about the choice of an optional instrument.

“I think our main concern is the nature of the instrument,” Johnstone says. “If we need to change consumer law why aren’t we doing it through the normal legislative route? I find an optional regulation for dealing with things extremely strange - it will increase legal uncertainty and cause ­confusion.”

There is also a question of whether the Commission is side-stepping other questions by ­shoehorning them into the sales law. Some of the consumer ­protection issues, suggests Wynn, would have been better included in the recent directive on consumer rights. Douglas says trading online should be handled in laws on e-commerce, rather than ­making it a contract law issue.

Freedom of choice is another potential problem, particularly in business-to-business transactions, where large companies are likely to dictate the choice of contract. The optional nature of the instrument will leave the bargaining power where it is now.

The Commission has invited feedback on the proposals, which were also put to EU justice ministers at the group’s regular meeting last week (28 October). But the window is short - just two months - meaning those wishing to ­comment must work fast.

A spokesperson for the UK Ministry of Justice said the ­Government would be issuing a call for evidence from interest groups, adding: “We’re interested in hearing views on the likely impact of the proposed regulation, if there is a need for legislation of this kind and whether it will address the problems perceived by the Commission.”

Ultimately, the Commission hopes the law will help boost cross-border trade, thus ­increasing the cushion against a future ­economic crisis and strengthening the internal ­market which, as Staudenmayer notes, is “the whole idea of the EU”. But its success will depend on take-up of the law and that will not be known for some time.

Key facts

• The common sales law (CSL) could be used in any cross-border sales contract involving at least one EU member state, including for digital content. Related service contracts are also included.
• Business-to-business contracts are covered provided one party is a small or medium-sized enterprise with annual turnover of e50m or less.
• Traders will have to draw consumers’ attention to the use of the CSL.
• Judgments applying the CSL will be collected into a database.
• The CSL will be reviewed five years after implementation.
• If the terms of the contract are not met by the seller, a consumer will be able to ask for: the repair or replacement of the goods; to terminate the contract and request a refund; or get a price reduction or claim damages.
• Member states will be able to choose to allow the CSL’s use in intrastate transactions.

Key figures

• EU companies likely or very likely to use common sales law: 71 per cent for business-to-consumer transactions, 70 per cent for business-to-business transactions
• 9.3 per cent of EU companies currently trade cross-border
• 44 per cent of Europeans say they do not buy cross-border
• €10,000: cost of adapting sales contracts to one additional EU jurisdiction

Source: European Commission