Options for a Common Law of Contract in the European Union

A principle aim of the European Union (EU) is to facilitate trade between member states. To achieve this, a single market has been established to enable businesses and individual consumers to trade freely. However, impediments to trade still remain. One major problem is the fact that each country has separate laws relating to the creation and enforcement of contracts.

Over the years, the EU has tried to harmonise many national laws. For instance, uniform rules to protect consumers have been introduced. Thus, where a consumer buys goods or services from a business in another member state, the applicable law in the event of a dispute, will be the law of the consumer’s country of residence unless the contract states otherwise. Even in these cases, consumers can rely on their national law if it would afford them greater protection. The protection of the rights of consumers is a core principle in EU decision making.

Nevertheless, this does place an additional burden on businesses which must be aware of the consumer regulations applicable in any country where they trade. This can make businesses, the smaller ones in particular, reluctant to provide goods and services to consumers in other member states, which in turn restricts the effectiveness of the single market.

In business-to-business contracts, the parties can choose which law should govern the contract. They can also incorporate into their contracts, measures such as the Vienna Convention on the International Sale of Goods or the UNIDROIT Principles of International Commercial Contracts. However, there is no common European contract law to govern contracts and provide uniformity across the EU. Large businesses have an advantage because they can use their strong bargaining position to determine the jurisdiction which will govern the contract, which puts them in an advantageous position vis a vis smaller businesses. There would be considerable benefits to trade within the EU if there was a common set of rules governing contracts.

As a response to these problems, the European Commission published, in July 2010, a discussion document setting out a range of options leading towards a system of contract law that would apply across the EU. There is currently a process of consultation under way which will end on 31 January 2011.

The main options that the European Commission is proposing are as follows:-

1.   In 2008 the European Commission published a draft Common Frame of Reference covering principles, definitions and model rules of civil law with provisions for business and consumer contracts. One proposal is that this could be used by member states to reform their existing law and lead to a voluntary convergence of national laws;

2.   A ‘toolbox’ of provisions to be used as a reference tool by the European Commission to ensure coherence and quality of EU legislation;

3.   An optional instrument of contract law, which member states could adopt into national law or which parties to a contract could use in place of national law;

4.   EU contract law which would run in parallel with national law and which parties to a contract could use if they chose to do so;

5. the adoption of a minimum set of standards for contract law across the EU;

6. Replacing national laws with a uniform European set of contract rules which would be uniformly applied throughout the EU;

7. A European Civil Code covering not only contract law but other areas of law such as tort thus further reducing the need to rely on national law.

In terms of each of the above options, the last two are almost certain to be rejected. It would be very difficult to reconcile the different legal traditions across Europe. It would go against the principle of “subsidiarity” whereby the EU should not act unless it is more effective than action at national level and the principle of “proportionality” which requires the EU to take action only insofar as it is necessary to achieve the objectives of the EU.

The first two options have the advantage of simplicity. They would be relatively uncontroversial and would not require a change in EU or national laws. However, they would not achieve the aim of a uniform set of contract law across member states.

The third option has the advantage of a definitive set of legally enforceable rules that could be adopted without the need to replace local laws. However, having two sets of contract laws (national and EU) could create additional complexity and there is no guarantee that the rules would be uniformly interpreted across the EU.

Option four would have the advantage of a single set of rules without having to interfere with national law. However, as with option three, having two sets of contract rules running in parallel (national and European) could result in additional legal complexity.

Option five would not necessarily result in rules being uniformly applied across member states. As a result businesses would still need to abide by different national contract rules.

There are clearly a lot of issues for the EU to consider before it decides which option would best achieve the aim of making trade easier across member states. Consequently, it will be some time before the EU decides which option to pursue.

Richard Abbott.

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