Draft for a First Chapter (Subject Matter, Application and Scope) of an Optional European Contract Law

European Research Group on Existing EC Private Law (Acquis Group)

Prepared by Gerhard Dannemann

(2011) Oxford U Comparative L Forum 2 at ouclf.iuscomp.org | How to cite this article this article

Table of contents

Introduction

The European Commission’s “Expert Group on European contract law for stakeholders’ and legal practitioners’ feedback” has just published a Feasibility Study,1 which is largely, but not exclusively based on the Draft Common Frame of Reference for European Private Law (DCFR).2 This Feasibility Study contains a draft for a EU legal instrument which would create an optional European contract law.

The present contribution of the Acquis Group does not seek to comment on individual provisions contained in the Feasibility Study. Its main aim is to discuss those preliminary issues for which no draft has yet been made publicly available. This concerns rules on the subject matter, on the applicability, and the scope of such an optional European contract law. The drafting of such rules has to date been left in the hands of the European Commission; a first draft is due to be discussed at the next Expert Group meeting on 13 July 2011.

Two Briefing Papers relating to conflict of laws issues in the context of an optional European contract law were presented to an Interparliamentary Committee Meeting at the European Parliament in October 2010;3 another Briefing Paper also touches some conflict of laws issues.4 A few other recent publications discuss the conflict of laws aspects of such an optional instrument;5 more present views on its scope of application.6

The present paper is based on the following assumptions:

1. The EU will adopt a legal instrument, presumably in the form of a Regulation, which will establish a European contract law regime.

2. This European contract law will be optional. It will apply only if chosen by the parties.

3. This optional European contract law will be based on the above-mentioned Feasibility Study, which may ultimately be extended to cover some additional areas of contract law.

Such an optional European contract law would, in contrast to model laws such as PECL or UNIDROIT Principles, be state law, replacing the “regular” domestic contract law.

The present contribution does not aim to provide an overview of all subject-matter, scope and conflict of laws issues associated with an optional European contract law. Some friction may be caused in the interaction with domestic rules notably on property law, unfair competition law, and collective proceedings e.g. against the use of standard terms. The CFR Context Group is presently looking at these and some other issues of interaction between an optional European contract law and domestic legal systems; some tentative results may be available by the end of this year, with a full report due to be published in late 2012 or early 2013.7

A. Subject Matter

A number of choices must be made as concerns the subject matter of the Instrument, in particular:

  • whether the optional law should be limited to contracts for the sale of goods, extend to digital rights and services, to some service contracts, to all service contracts, or should generally be available for all contracts;
  • whether the optional law should be limited to cross-border contracts;
  • whether the optional law should be limited to intra-EU contracts.

(1) Types of contract

The Feasibility Study does not appear to limit the scope of application to any particular types of contract. Instead, it provides general contract law rules plus specific rules for two particular types of contracts (sale of goods, Part IV, and “related service contracts”, Part V). Other contracts could fall under the somewhat opaque provision of Art. 1 paragraph (2):

Issues within the scope of the instrument but not expressly settled by it are to be settled in accordance with the principles underlying it without recourse to national laws.

The Acquis Group understands that the Commission presently plans to limit the types of contract to which the Optional Instrument can be applied to those for which the Feasibility Study contains specific rules, namely the sale of goods and what are called “related service contracts”.8 The Acquis Group agrees that the types of contracts should be limited, but would add some particular types of contract to the part which contains specific rules, namely

  • contracts for digital rights and services (even if not related to the sale of goods);
  • travel contracts and
  • consumer guarantees.

Consumer guarantees are closely linked to contracts for the sale of goods, which are to be covered. Allowing parties to choose the optional European contract law for consumer guarantees would greatly facilitate cross-border marketing and increase legal certainty for consumers who buy those goods under the optional European contract law.

There is also clear acquis on travel contracts in the form of the Package Travel Directive, which can blend fairly easily with the rules contained in the Feasibility Study.

Contracts for the sale of digital rights and services are within the scope of the Feasibility Study, but only if they can be classified as “related service”, or if the digital rights in question are incorporated in tangible property, such as CDs or DVDs. This will create an unnecessary legal division between the distribution of software, of audio and video content through tangible data carriers on the one hand, and distribution of the same content by download on the other. Many businesses will presently give the customer the choice between those two distribution channels. Such businesses could either not use the optional European contract law at all, or would be forced to divide visitors on their websites, the terms of the contract and the applicable law according to their preferred distribution channel. Shoppers who are interested in a mixture of distribution types for a combined order of e.g. musical downloads and HD Video Discs would have to order those under two different contracts.

In a similar line, digital services are frequently associated with contracts for the provision of software. It would frequently be artificial to dissect a contract into one part which contains the sale of goods (software sold on a tangible medium), or the sale of digital rights (software distributed by download), and any associated service contract (e.g., for updates and troubleshooting).

(2) Positive or negative list

The types of contract for which the optional European contract law will be available could be stated in a positive (and comprehensive) list, with the effect that the optional European contract law cannot be chosen for any contract which is not indicated on this list. In the view of the Acquis Group, such a positive list is the best way to delimit the types of contracts.

The alternative approach would be to use a broader definition (which could include all service contracts), with a negative list of contracts for which the Instrument cannot be used, such as most contracts for financial services and insurance, and contracts for medical and legal services, which presently are not excluded by the Feasibility Study. Such a negative list approach has, however, various disadvantages. First, it is difficult to ensure that the negative list is complete. Second, this would create a difficult problem of how the general contract rules contained in the Instrument should interact with specific rules for particular types of service contracts under domestic law. Third, this could create a difficult conflict of laws problem with form provisions. As the law which governs the contract is one of those which, under Art. 11 Rome I Regulation, can alternatively make a contract formally valid, the Instrument’s lack of particular forms provisions e.g. for distance learning contracts could mean that no form needs to be observed for the conclusion of such a contract if the Instrument law was chosen. This could be overcome by a specific conflict of laws (or form) provision in the Instrument (see below), but is better avoided.

(3) Limitation to cross-border contracts?

Two geographical limitations of the optional European contract law are presently discussed. The first of these is to limit a choice of the optional European contract law to contracts between parties who are resident in different states.9 This is a feature of the UN Convention on the International Sale of Goods (CISG), which was particularly designed for cross-border contracts. The Feasibility Study frequently refers to cross-border situations, but contains no rule on this aspect.

One important difference between CISG and the optional European contract law is that the latter is intended to facilitate the European-wide sale of goods (or services) through e-shops under what has been called a “blue button” model.10 E-shops wishing to use the optional European contract law will demonstrate this by displaying a specific symbol on their websites. Consumers can express their choice of this optional European contract law by clicking on this “blue button”.

This intended use provides a forceful argument against a limitation to cross-border contracts. Such a limitation would force e-shops to offer two different sets of contracts, namely one for their home customers (using their own domestic law), and one for foreign customers (using the optional European contract law). It is technically difficult to discern, let alone verify the place of residence of a customer on a web-based platform, as this may differ from both billing address and delivery address. This would also require customers to disclose their place of residence before being presented with the contract terms which would apply to their transaction, an information duty imposed by several EC Directives in force. Customers could feel discouraged from using an e-shop which forces them to disclose personal information in order to obtain information about the contract terms.

The same limitation is particularly problematic for the creation of European-wide platforms for auctioning or selling goods over the internet. Platform providers presently see no alternative to operating separate platforms for each Member State. The optional European contract law could facilitate the creation of European platforms, but this would require that one and the same law can indeed be used for all transactions conducted through such an all-European platform.

An argument in favour of such a limitation can arise from different levels of consumer protection (or, generally, protection of the weaker party to a contract). Member States with a comparatively low level of protection are unlikely to mind if parties can choose a higher level of protection, as they will regularly allow this as a matter of substantive contract law. More problematic are Member States who offer a higher level of protection than an optional European contract law (see below). A possible solution for this problem can be found within a provision on mandatory consumer protection rules (see below).

Art. 3 paragraph (3) Rome I Regulation could be seen as an obstacle. This provision states:

3. Where all other elements relevant to the situation at the time of the choice are located in a country other than the country whose law has been chosen, the choice of the parties shall not prejudice the application of provisions of the law of that other country which cannot be derogated from by agreement.

This problem can be overcome by making clear that, within its scope of application, the optional European contract law sets its own mandatory rules. Such a provision will at any rate be advisable in relation to Art. 6 paragraph 2 Rome I Regulation (see below). In the present context of Art. 3 paragraph (3), the nature of such a provision would largely be declaratory.

For these reasons, a clear majority within the Acquis Group would not limit the optional European contract law to cross-border contracts.11

The present paper does not comment on issues of legislative competence, which could be seen as a reason for limiting the optional European contract law to cross-border transactions.

(4) Limitation to intra-European contracts?

One could also limit the availability of an optional European contract law to contracts in which all parties are resident within the European Union. Those who see an optional European contract law chiefly as a tool for further integration of the internal market would find such a limitation logical. In our view, however, this is neither sound as a matter of economic policy, nor entirely feasible.

First, the arguments against a limitation to cross-border contracts which have been presented above will also apply to a limitation to intra-EU contracts: the necessity to sell under different legal regimes, the difficulty in ascertaining the residence of a customer, and having to enquire the residence of a customer before indicating the applicable law and the terms of the contract.

Moreover, it would be difficult to explain to European e-shop owners why they are not allowed to market goods or services to willing Swiss or Norwegian customers under the same contract model. Their business with customers outside the EU would become more expensive and complicated. This would not help to promote the many small and medium enterprises which would otherwise benefit from the availability of a uniform law. If, conversely, Swiss or Norwegian e-shop owners were prohibited from marketing their goods and services under a transaction cost saving uniform contract law, this could easily raise difficult issues of conformity with WTO rules. Moreover, the optional European contract law could prove to be a popular contract law regime outside the European Union, for example in Balkan countries. Parties must then be aware, though, that the non-EU countries may have their own mandatory consumer protection laws, so that uniform application of the optional instrument law cannot be guaranteed vis-à-vis consumers who are residents of non-EU member states.

More generally, while the optional European contract law could contain a rule that it must not be chosen unless all parties are resident in EU Member States, it could not prevent parties from nevertheless making such a choice.12 Parties may simply not be aware of this unusual limitation. Parties may simply have copied the choice of law clause from elsewhere. Parties may also deliberately choose the optional European contract law as “model law”, similar to non-state uniform law such as PECL or the UNIDROIT Principles. In this context, it should be remembered that Recital 13 of the Rome I Regulation allows parties to incorporate “into their contract a non-State body of law or an international convention”.

When interpreting such a choice, courts would therefore in all likelihood apply the optional European contract law in the way they would apply PECL etc, i.e. within the limits set by the mandatory rules of the applicable contract law. That would raise a number of additional difficult questions which, as will be shown below, can be largely avoided by allowing a free choice of the optional European contract law as state law.

Moreover, we cannot see any harm in allowing parties who are resident in non-EU Member States to choose the optional European contract law, just as they can today choose any of the contract laws of the EU Member States.

In our view, therefore, such a limitation is not advisable.

(5) Personal scope

The Feasibility Study contains no express provision which would limit the optional European contract law to business to consumer transactions and to business to business transactions.13 However, the fact that the mandate of the Expert Commission which drafted the Feasibility Study made specific reference to these two situations14 can be seen as an indication that the Commission will wish to limit the application accordingly. The Acquis Group takes the view that there should be no such limitation of the personal scope. The exclusion of certain groups of persons who qualify neither as consumers nor as businesses (e.g., some church institutions) from buying under “blue button” contracts is equally problematic from a practical and economic viewpoint. The same can be said about the exclusion of C2C or C2B contracts (e.g., somebody selling his own used car to a business). C2C and C2B contracts are becoming increasingly relevant through the use of internet platforms, and even non-electronic cross-border sales from consumers to consumers are on the rise (as, for example, with used cars, for which standard forms are widely available). Attention must therefore be given to provisions which would be too burdensome for consumers as suppliers of goods or services, e.g. in the area of control of standard terms, or obligations of sellers.

In summary, the Acquis Group proposes the following rule for the subject-matter of the optional European contract law:

Article 1:101 Subject Matter

This Instrument establishes an optional European contract law for

(a) contracts for the sale of goods,
(b) contracts for the sale of digital rights and for digital services,
(c) service contracts related to the sale of goods or of digital rights,
(d) contracts for travel, and
(e) consumer guarantees.

While not wishing to limit the availability to cross-border, intra-EU or B2B contracts, the Acquis Group did not favour the adoption of a rule which would state this expressly. If such a rule should be adopted, it could read as follows:

(2) This optional European contract law is available to all parties, regardless of whether they are businesses, or consumers, or whether they are residents of a European Union Member State. It is also available for contracts in which parties are residents of the same state.

B. Applicability

(1) “28th contract law” v “second contract law”

There is some debate as to whether such an optional European contract law should be formulated as “28th contract law in Europe”, as announced by the Commission on various occasions, or as a “second contract law” for each Member State (as alternative to each state’s domestic contract law), as discussed i.a. in the above-mentioned Briefing Papers.

In our view, this discussion is confusing and superfluous, at least if the above-made assumption is correct that such a contract law would be enacted by EC legislation. In this case, the new contract law will necessarily be both “28th” and “second” contract law.

“28th contract law”. A Regulation adopted to this effect will create a new contract law regime which is available for choice by the parties throughout Europe (and also elsewhere, as we will see below), thus adding one to the number of European domestic contract law regimes offered by Member States for choice by the Parties (Art. 3 Rome I Regulation).

The number 28, however, is misleading.

The number of domestic contract laws within the European Union exceeds the number of Member States. Scottish law, and Spanish foral laws, have their own sets of contract rules.

It should also be remembered that, under Art. 3 Rome I Convention, parties are free to choose any contract law, regardless of whether this belongs to a Member State. Nothing would prevent e.g. parties to a Polish-Portuguese contract from choosing Swiss law.

At any rate, regardless of how such law would be made applicable (see below), the Regulation would (a) belong to the body of EC law and (b) increase the number of available contract regimes throughout Europe by one. In this sense, it will be the “30somethingth contract law” in the European Union.

“Second contract law”. If enacted by Regulation, this optional European contract law will also form part of the law of Member States, as all regulations do. The optional European contract law would thus also add one to the number of contract laws of any Member State. Again, the number 2 is somewhat misleading, and not only for the United Kingdom and for Spain, as those EU Member States which have ratified CISG already have a “second contract law”, although limited to contracts for the sal of goods.

An enactment by Directive is not advisable, as this would counteract the envisaged use as an optional uniform contract law for use throughout Europe. But even if a Directive was used, once this Directive was transposed and implemented by Member States, it would necessarily also establish an alternative contract law within each Member State.

For these reasons, any optional European contract law enacted by the EU legislator will necessarily have the functions of both a “28th” contract law and a “second” contract law.

  • A “28th contract law only” could be enacted neither by Regulation nor by Directive.
  • The only way in which a “second contract law only” could be enacted would be outside of EU legislation, namely by way of an International Treaty between all Member States (as was the case for the Rome Convention on the Law Applicable to Contractual Obligations).

(2) Specific or regular choice of law rules

A different question, which can easily be confused with the issue of “28th” or “second” contract law, is whether the optional European contract law should

  • come with its own (more or less) complete set of conflict of laws rules, in particular those which determine whether this optional European contract law applies to a given contract, or whether it
  • should largely leave conflict of laws issues, and in particular the choice of this law, to normal conflict of laws rules (as Art. 3 Rome I Regulation), adding some modifications which should reflect the specific nature of this optional European contract law.

Lein’s Briefing Paper uses CISG and its predecessor, the Hague Convention, as models for uniform contract laws which, at least to some degree, come with their own choice of law rules. She comes to the conclusion that specific conflict of laws rules should be adopted.

On closer inspection, however, CISG combines both models. Under its Art. 1, the Convention applies if the parties have their seats of businesses in two different Contracting States. That is a specific applications rule. It cannot be used as such for an optional European contract law which requires a choice by the parties. It could at best be recycled as a factor which limits such a choice (see below).

CISG also applies, however, if the normal rules of private international law of the forum point to the law of a Contracting State. This provision was intended to expand the international scope of application of CISG – whenever the law of a Member State would apply by default, this would, in absence of any choice, lead to CISG. And even a choice of the parties to the law of a Member State, made in ignorance of the existence of CISG, would make CISG applicable to the contract.

In our view, neither rule makes any sense for an optional European contract law which should only apply by choice of the parties.

What counts for the application of an optional European contract law is that parties have chosen this law. All conflict laws known to us allow the choice of an existing state law, and would therefore also allow the choice of an optional European contract law which is in force throughout the European Union. The limitations to such a choice, which are also common to conflict laws, will be discussed below. The Max Plank Institute argues that by using normal choice of law rules, the Optional Instrument’s rules cannot take precedence over domestic consumer protection rules; it will be shown below that this is not the case.15

In our view, there is no need to create a specific set of rules on how the optional European contract law can be chosen by the parties. Copying Art. 3 Rome I Regulation verbatim remains a possibility, but creates unnecessary duplicity. If a different rule on choice is formulated, this discrepancy can easily lead to failed choices, in particular if the OI rule on choice of law is stricter (e.g., requiring a particular form, or other conditions to be met). This will invariably lead to failed choices of law which would have been upheld if the regular conflict of laws rules had applied.

In our view, regular choice of law rules (such as Art. 3 Rome I Regulation) are therefore not only entirely sufficient, but even better suited for an optional European contract law. Some modifications may nevertheless be required for particular conflict of laws issues (e.g., form, mandatory laws), as will be shown below.

(3) Pre-contractual duties

Pre-contractual duties arise before parties have chosen any particular law, and apply regardless of whether parties subsequently enter into a contract.

In such a situation, Art. 12 Rome II Regulation makes the (hypothetical) contract law applicable to culpa in contrahendo liability. The same should generally be true for pre-contractual duties. However, the criterion that this law “would have been applicable to it had [the contract] been entered into” is not practicable for a purely optional law which requires a choice by both parties. Therefore, the Instrument should contain its own conflict of laws rule for the application of its provision on pre-contractual duties.16

One should make the application dependent on whether a party is marketing goods or services with reference to the Instrument. This could be formulated as a standalone rule, or alternatively as an explanatory rule on Article 12 Rome II Regulation, i.e. that if a business is marketing goods or services with reference to the Instrument, then the Instrument “would have been applicable to the contract had it been entered into”. Regardless of how this rule is formulated, it is doubtful whether the courts of non-EU member states will accept that this conflict of laws rule for the Instrument should replace their own conflict rule for pre-contractual duties. That probably cannot be helped.

If parties subsequently enter into a contract which is governed by a different law, then this law should also govern (retroactively) the pre-contractual duties. This avoids a dépeçage between the law governing pre-contractual information duties and the applicable contract law, but can create the unwelcome problem of a change of applicable law for such pre-contractual information duties (Statutenwechsel), as is also true for Art. 12 Rome II Regulation.

An alternative solution would be to wait until parties have chosen “blue button” law, and then make Chapter 2 provisions apply retroactively. This, however, makes Statutenwechsel the regular case for pre-contractual information duties, which Article 12 Rome II Regulation tries to avoid.

Article 1:102 Applicability

(1) The European contract law established by this Instrument applies if the parties to the contract have chosen it according to the rules of Private International Law.

(2) The provisions of Chapter 2 apply when a business markets goods or services with reference to this Instrument, unless the parties subsequently enter into a contract for those goods or services which is governed by a different law. The use of the “blue button” signet (Annex I) is such a reference to this Instrument.

C. Scope

Ideally, the Instrument should provide rules for all areas of law which are governed by the law of the contract under the Rome I Regulation. Only this could really guarantee a uniform application of the Instrument throughout the entire EU. Points i) to k) below are presently not covered by the Feasibility Study. They are nevertheless reproduced below as a reminder of what should be included in order to dovetail with Rome I Regulation. In order to highlight this connection, Rome I Regulation terminology has been preferred over Feasibility Study or DCFR terminology, which would have been better suited otherwise.

Article 1:103 Scope

(1) This Instrument governs

(a) pre-contractual duties and consequences of their breach,
(b) formation of contracts,
(c) validity of contracts, or of any of their terms,
(d) interpretation,
(e) performance,
(f) consequences of any non-performance,
(g) extinction and prescription of contractual rights,
(h) consequences of nullity of a contract,
(i) assignability of contractual rights and the relationship between the assignee and the debtor,
(j) recovery between multiple debtors of contractual obligations, and
(k) set-off against contractual rights.

(2) It does not govern any effects which a contract may have on property rights.

D. Mandatory consumer provisions

Art. 6 Rome I Regulation restricts the choice of law in consumer contracts. Essentially, a choice of law must not deprive a consumer of the protection which mandatory provisions at his or her place of residence prescribe.

An optional European contract law as a means for facilitating cross-border trade within the EU will make sense only if this law is applied uniformly throughout the EU. If different consumer protection standards within different Member States were upheld against this European contract law, such a uniform application would not be possible. Existing EU consumer protection provisions have, however, been formulated as minimum harmonisation rules. By contrast, consumer provisions in an optional European contract law would have to be formulated as fully harmonized rules. It appears to be generally understood that, in order for such maximum harmonization to be politically acceptable, the consumer protection rules in an optional European contract law would have to achieve a level of consumer protection which goes beyond the present minimum level of consumer protection throughout Member States, approaching the higher levels of consumer protection which exist in some Member States.17

As concerns conflict of laws, a provision would be required in the optional European contract law which ensures that more demanding domestic provisions on consumer protection do not affect the provisions of the optional European contract law – within its scope. This could be done in two ways:

1. By a specific conflict of laws provision, as apparently presently envisaged by the Commission.18

2. Alternatively, one could use a substantive provision for achieving the same goal. As shown above, the optional European contract law to be established would necessarily have the quality of a “second” contract law within the laws of all Member States. This “second” contract law establishes an alternative set of consumer protection rules which become available once chosen by the parties. The Instrument could thus simply clarify that, if chosen, the Instrument embodies, within its scope of application, those consumer protection provisions which cannot be derogated.

This alternative has three advantages. First, it does not require any change to regular conflict of laws rules. Second, this also implies that its application does not depend on whether the forum is a EU Member State (although a non-EU forum remains naturally free to police the optional European contract law for conformity with its own overriding mandatory provisions). Third, unlike a conflict of laws provision, a substantive provision can also overcome problems with Art. 9 Rome I Regulation. The stipulation that the mandatory norms of the Instrument law are, if chosen, the mandatory norms which apply to a contract, makes it unlikely that Art. 9 paragraph (2) Rome I Regulation can be invoked against Instrument law (see below).

Such a provision could read as follows:

Article 1:104 Derogation from mandatory provisions

Where the European contract law established by this Instrument applies, this Instrument contains for all Member States, within its scope of application, those provisions which cannot be derogated from by agreement in the meaning of Articles 3 paragraph (3) and 6 paragraph (2), or which are mandatory in the sense of Article 9 paragraph (2) Rome I Regulation.

Before Danish courts, this provision will need to be applied mutatis mutandis. Alternatively, such a provision could be adopted without reference to those three provisions of the Rome I Regulation.

E. Overriding mandatory provisions

Art. 9 paragraph (1) Rome I Regulation defines “overriding mandatory provisions” as “provisions the respect for which is regarded as crucial by a country for safeguarding its public interests, such as its political, social or economic organisation, to such an extent that they are applicable to any situation falling within their scope, irrespective of the law otherwise applicable to the contract under this Regulation“. Paragraph (2) leaves courts the right to apply these overriding mandatory provisions even where an applicable foreign law would provide otherwise. Paragraph (3) allows a court to consider overriding mandatory provisions of another state if they render a performance unlawful which is to be effectuated in this state.

Unlike Arts. 3, 4 and 6 Rome I Regulation, Art. 9 deviates substantially from its predecessor (Art. 7 Rome Convention). Both provisions were controversial. Art. 9 remains to be tested in the courts. It would, in our view, be neither advisable nor politically feasible to complicate this situation by adding another provision on overriding mandatory provisions.

The provision which has been proposed above for dealing with Art. 6 Rome I Regulation will at the same time avoid problems with Art. 9. As an alternative domestic contract law, the optional European contract law would, within its scope of application, define all mandatory rules. It would naturally leave overriding mandatory rules outside of its scope of application and regulation (e.g., on weapons control) intact.

Art. II.-7:302 DCFR provides that where a contract “infringes a mandatory rule of law, the effects of that infringement on the validity of the contract are the effects, if any, expressly prescribed by that mandatory rule”. If a similar rule is to be added to those contained in the Feasibility Study, it should be modified to make clear that this concerns mandatory rules outside of the scope covered by the optional European contract law, in order to avoid e.g. deviating consumer protection rules of the forum to interfere with the uniform application of the optional European contract law.

F. Choice of jurisdiction

Choice of jurisdiction is governed by Art. 23 Brussels I Regulation. In our view, there is no need to add any specific provision on choice of jurisdiction to an Instrument which establishes an optional European contract law.

It is well known that choice of jurisdiction under Art. 23 Brussels I Regulation is a little more restricted than choice of law under Art. 3 Rome I Regulation. In particular, Art. 23 Brussels I Regulation requires the observance of a particular form (with different options, including textual form in electronic transactions under paragraph (2)). The different requirements can entail that a joint choice of law (to the optional European contract law) and jurisdiction clause (for the courts of a EU Member Sate) is valid as concerns the choice of law, but void as concerns the choice of jurisdiction. This, however, is generally true for choice of law under Art. 3 Rome I Regulation and choice of jurisdiction under Art. 23 Brussels I Regulation.

Choice of jurisdiction is limited for transactions between businesses and consumers. For most B2C contracts, the consumer is given the choice between the courts at his or her place of residence, or at the place of residence of the business. The business, on the other hand, can sue only at the place of the consumer’s residence (Art. 16 Brussels I Regulation, minor exceptions provided in Art. 17).

Businesses could see this as an obstacle to marketing their goods across Europe using the optional European contract law. However, they will rarely have to sue the consumer if they collect payment before or on delivery, which is very common for internet-based B2C transactions. The main obstacle from a business point of view would therefore be the danger of being sued by the consumer for damages or a refund at the consumer’s place of residence. That, however, is a price they may have to pay in order to gain the confidence of consumers for contracting with a business which may be located on the other end of Europe. At any rate, Art. 15-17 Brussels I Regulation were intensively negotiated and are unlikely to be changed for an optional European contract law.

An optional European contract law could be usefully linked to the ongoing work on “Online Dispute Resolution” (Working Group III) at UNCITRAL.19

G. Issues covered by a choice of law under Arts. 10 and 12 Rome I Regulation, but not by the Feasibility Study

A well-known conflict of laws problem with CISG relates to issues which are normally covered by the choice of a contract law but which are beyond the substantive scope of CISG, as for example interest in case of late payment. This problem is not all that difficult to resolve. If parties have not chosen a “backup contract law”, the conflict rules which determine the applicable law in the absence of choice (Art. 4 Rome I Regulation) will point to the necessary “backup contract law”. Nevertheless, it is highly advisable to avoid such blank spaces by ensuring that the Optional Instrument covers the full range of issues listed in Arts. 10 and 12 Rome I Regulation. These include in particular “the various ways of extinguishing obligations, and prescription and limitation of actions”, but also unjust(ified) enrichment law, more precisely: the fate of performances made under a contract which is void, was avoided or terminated (“the consequences of a total or partial breach of obligations” and “the consequences of nullity of the contract”). The latter should also include liability under a void or avoided contract (II.-7:304 DCFR). (See also below for issues covered by the same contract law under Arts. 14-17 Rome I Regulation.)

The Feasibility Study contains rules on recovery of performances if “a contract is avoided or terminated by either party”, but not on recovery if a contract is void from the outset. This is in conformity with the Feasibility Study’s lack of rules on illegality or formal validity, but nevertheless implies that a different law must be applied for what the Rome I Regulation calls “the consequences of nullity of the contract”. By contrast, Art. II.-7:301 DCFR makes a contract void to the extent that it infringes a principle which is recognised as fundamental in the laws of EU Member States (which includes the European Convention on Human Rights), and that nullity is required to give effect to this principle. Likewise, the rules in Book VII DCFR (Unjustified enrichment) cover the consequences of nullity.

H. Issues covered by the Feasibility Study, but not by choice of law under Arts. 10 and 12 Rome I Regulation

An Optional Instrument could include several contract law issues for which separate conflict of laws rules exist. This concerns in particular form and agency.

(1) Formal validity

Art. 11 Rome I Regulation provides for most cross-border transactions rules which make several laws alternatively applicable to formal validity, including the law which governs the contract itself. In consequence, if the contract satisfies the formal validity requirements of one single of these laws, it is valid.

The Feasibility Study contains some form rules (in particular that some information must be provided on a durable medium), but apparently no rules which impose a particular form for a contract to be valid. The DCFR contains additional form rules, but again it is doubtful whether any of these relate to formal validity of a contract.

Such rules will frequently require a particular form in which information must be provided, or in which a notice must be given, or will entitle a party to a copy of the contract (Art. 19 paragraph (7) Feasibility Study). They will often come with their own set of remedies, as for example provided in Art. II.-3:109 DCFR. Taken together with the principle of freedom of form enshrined in Art. 9 Feasibility Study and Art. II:-1:106 DCFR, this could mean that a choice of the optional European contract law for e.g. the sale of an ocean cruiser could under Art. 11 Rome I Regulation imply that such contracts can be validly concluded over the telephone.20 The wider the potential range of application of the optional European contract law, the more problematic would be such a complete lack of form. Under the DCFR, which is not limited to any particular types of contract, this would affect e.g. contracts for the sale of financial services, or contingency fee agreements. The same would be true for the Feasibility Study if its subject matter remains as unlimited as it is in its present formulation.

Two solutions are possible.

1. A specific conflict of laws provision excludes the optional European contract law from the number of laws which can alternatively make a contract formally valid.

2. Alternatively, questions of formal validity are expressly excluded from the scope of application of the Regulation.

The effect of both solutions is similar. In our view, the second should be preferred, because it avoids any modification of Art. 11 Rome I Regulation.

Both solutions have the disadvantage that either the number of contract laws which can make the contract formally valid is reduced, or that a “backup contract law” must be found to regulate formal validity.

This can be partially avoided by a refined solution for those standard contract types for which the optional European contract law contains specific provisions, such as the sale of goods. The Feasibility Study comes close to this approach by providing specific provision on sale of goods and on services related to the sale of goods.

A provision for the first option (conflict of laws solution) could look like this:

For contracts other than for the sale of goods, [etc], where the contract law established by this Regulation does not impose a form requirement for the conclusion of a contract, and one or more other laws apply alternatively to formal validity, the contract is formally valid if it satisfies the requirements of this other, or of one of the other laws.

A provision for the second option (scope of application solution) could be inserted in the provision which regulates the scope of the optional European contract law, and regulate that this excludes

the formal validity of contracts other than those for the sale of goods, [etc].

If, on the other hand, the scope of the optional European contract law is limited to a positive list of contract types, a policy decision should be taken whether any of these require the observation of any particular form in order to be formally valid. In the view of the Acquis Group, this will not be necessary for any of the contracts proposed for inclusion in Art. 1:101. This implies that formal validity should not be excluded from the scope of application of the optional European contract law, because otherwise a contract would be invalid if Art. 11 Rome I Regulation invoked a law (or only such laws) which require the observation of a particular form. This could force e-shops to enquire about, and comply with, formal validity regulations in all countries in which they wish to market their goods.

(2) Assignment, subrogation, multiple liability and set-off

The Rome I Regulation contains in Arts. 14-17 separate provisions on assignment, subrogation, multiple liability and set-off. Depending on whether these areas will be included in the optional European contract law, different laws could thus apply to these questions.

However, for some of the issues regulated in these provisions, the law which governs the contract which gives rise to the claim or liability in question is invoked. It is advisable that the optional European contract law regulates these issues, as otherwise a “backup contract law” will be needed. These include:

Art. 14 Voluntary assignment and contractual subrogation

2. The law governing the assigned or subrogated claim shall determine its assignability, the relationship between the assignee and the debtor, the conditions under which the assignment or subrogation can be invoked against the debtor and whether the debtor’s obligations have been discharged.

Article 16 Multiple liability

If a creditor has a claim against several debtors who are liable for the same claim, and one of the debtors has already satisfied the claim in whole or in part, the law governing the debtor’s obligation towards the creditor also governs the debtor’s right to claim recourse from the other debtors. The other debtors may rely on the defences they had against the creditor to the extent allowed by the law governing their obligations towards the creditor.

Article 17 Set-off

Where the right to set-off is not agreed by the parties, set-off shall be governed by the law applicable to the claim against which the right to set-off is asserted.

Questions of alternative application (as under Art. 11 Rome I Regulation on formal validity) do not arise in this context.

The DCFR contains provisions for all these areas of contract law, the Feasibility Study has no such provisions, although it occasionally presumes their existence. For example, set-off is mentioned in Art. 84 (Terms which are presumed to be unfair), lit c, and Art. 187 (Renewal by acknowledgment).

In our view, no specific conflict of laws provisions on these issues are required for an optional European contract law.

(3) Agency

The contractual relationships between principal and third party, and between agent and principal, follow normal conflict rules. The optional European contract law could be chosen for either relationship. However, the grant of authority of the agent is usually governed by specific conflict rules, which may distinguish between authority granted externally (by announcement of the principal to the third party), or internally (by announcement, or by contract between principal and agent). The place where a grant of authority is used can also play a role. There is, however, no uniform European conflict law on this issue, which is excluded from the scope of application of the Rome I Regulation. The 1987 Hague Convention on the Law Applicable to Agency has been ratified only by a few Member States.

In our view, it would be a very ambitious undertaking to settle this unresolved question within specific conflict of laws provisions for an optional European contract law. The question which law should govern the grant of authority to the agent should therefore be left to domestic conflict laws.

I. Linked or “ancillary” contracts

The Feasibility Study regulates in Art. 44 what it calls “ancillary contracts”. It could apply to one or both of two linked contracts, subject to any restriction as to the types of contracts which may be imposed. The DCFR regulates linked contracts in II.-5:106 in the context of a right to withdraw from a contract, which is extended to any linked contract. This concerns in particular (but not exclusively) consumers who buy goods or services on credit, whereby the provision of credit is governed by a linked credit contract. This is of significant relevance to distance selling in general, and through e-shops in particular, and could therefore also be included in an optional European contract law. In this case, the substantive right of a customer to withdraw also from a linked credit contract would have to be secured by a conflict of laws provision which ensures that the withdrawal right applies to the credit contract even if this is not governed by the optional European contract law. Art. 44 paragraph (3) Feasibility Study can be understood as containing a hidden conflict of laws norm. It is preferable to turn this into an express conflict of laws norm.

Such a conflict of laws provision – which may not work fully if the forum is located outside the EU – could read as follows:

Article 1:105 Right to withdraw from a linked contract

(1) A consumer’s right to withdraw, under [Article 44 Feasibility Study / Article II.-5:106 DCFR], from an [ancillary] contract which is linked to a contract governed by the European contract law established by this Instrument, applies irrespective of the law which governs the linked contract.21

(2) Where the linked contract is a credit contract, paragraph (1) also applies to the consumer’s rights to withhold performance and to terminate the contract.

J. Summary: Proposed Provisions22

Article 1:101 Subject matter

This Instrument establishes an optional European contract law for

(a) contracts for the sale of goods,
(b) contracts for the sale of digital rights and for digital services,
(c) service contracts related to the sale of goods or of digital rights,
(d) contracts for travel, and
(e) consumer guarantees.

Article 1:102 Applicability

(1) The European contract law established by this Instrument applies if the parties to the contract have chosen it according to the rules of Private International Law.

(2) The provisions of Chapter 2 apply when a business markets goods or services with reference to this Instrument, unless the parties subsequently enter into a contract for those goods or services which is governed by a different law. The use of the “blue button” signet (Annex I) is such a reference to this Instrument.

Article 1:103 Scope

(1) This Instrument governs

(a) pre-contractual duties and consequences of their breach,
(b) formation of contracts,
(c) validity of contracts, or of any of their terms,
(d) interpretation,
(e) performance,
(f) consequences of any non-performance,
(g) extinction and prescription of contractual rights,
(h) consequences of nullity of a contract,
(i) assignability of contractual rights and the relationship between the assignee and the debtor,
(j) recovery between multiple debtors of contractual obligations, and
(k) set-off against contractual rights.

(2) It does not govern any effects which a contract may have on property rights.

Article 1:104 Derogation from mandatory provisions

Where the European contract law established by this Instrument applies, this Instrument contains for all Member States, within its scope of application, those provisions which cannot be derogated from by agreement in the meaning of Articles 3 paragraph (3) and 6 paragraph (2), or which are mandatory in the sense of Art. 9 paragraph (2) Rome I Regulation.

Article 1:105 Right to withdraw from a linked contract

(1) A consumer’s right to withdraw, under [Article 44 Feasibility Study / Article II.-5:106 DCFR], from a contract which is linked to a contract governed by the European contract law established by this Instrument, applies irrespective of the law which governs the linked contract.>23

(2) Where the linked contract is a credit contract, paragraph (1) also applies to the consumer’s rights to withhold performance and to terminate the contract.

Endnotes

* This Draft reflects the decisions taken by the European Research Group on Existing EC Private Law (Acquis Group) at its Plenary Meeting in Hull, 3-5 February 2011, and was agreed by the 19th Redaction Committee meeting in Osnabrück, 24-25 June 2011. The author chairs both the Redaction Committee of the Acquis Group and its Terminology Group. Not all of the positions presented in this paper coincide with the author’s personal views.

1 ‘A European contract law for consumers and businesses: Publication of the results of the feasibility study carried out by the Expert Group on European contract law for stakeholders’ and legal practitioners’ feedback’, http://ec.europa.eu/justice/policies/consumer/docs/explanatory_note_results_feasibility_study_05_2011_en.pdf, accessed 29 June 2011. This Group was formerly referred to as “Expert Group on a Common Frame of Reference in the area of European contract law“.

2 Study Group on a European Civil Code and European Research Group on Existing EC Private Law (Acquis Group), Principles, Definitions and Model Rules of European Private Law. Draft Common Frame of Reference (DCFR), (Outline Edition, 2009).

3 M Jagielska, ‘Issues of private international law linked with the adoption of an optional EU instrument in the field of contract law’ (2010), http://www.europarl.europa.eu/webnp/webdav/site/myjahiasite/users/emartinezdealosmoner/public/Jagielska%20EN.pdf; E Lein, ‘Issues of private international law, jurisdiction and enforcement of judgments linked with the adoption of an optional EU contract law’ (2010), http://www.europarl.europa.eu/webnp/webdav/site/myjahiasite/users/emartinezdealosmoner/public/Lein%20EN.pdf, both accessed 29 June 2011.

4 C Busch, ‘Scope and content of an optional instrument for EU contract law’ (2010), http://www.europarl.europa.eu/webnp/webdav/site/myjahiasite/users/emartinezdealosmoner/public/Busch%20%20EN.pdf, accessed 29 June 2011

5 Max Planck Institute for Comparative and Private International Law, ‘Policy Options for Progress Towards a European Contract Law: comments on the issues raised in the Green Paper from the Commission of 1 July 2010, COM(2010) 348 final’ (J Basedow, G Christandl, W Doralt, M Fornasier, M Illmer, J Kleinschmidt, S A E Martens, H Rösler, J P Schmidt and R Zimmermann), (2011) 75 Rabels Zeitschrift für ausländisches und Internationales Privatrecht, 371; C Busch, ‘Kollisionsrechtlilche Weichenstellungen für ein Optionales Instrument im Europäischen Vertragsrecht’ (forthcoming).

6 E.g. S Augenhofer, ‘A European Civil Law – for Whom and What Should it Include? Reflections on the Scope of Application of a Future European Legal Instrument’, (2011) 7 European Review of Contract Law, 195; V Mak, Policy Choices in European Consumer law: Regulation through ‘Targeted Differentiation’’, (2011) 7 European Review of Contract Law, 257; C Twigg-Flesner, ‘‘Good-Bye Harmonisation by Directives, Hello Cross-Border only Regulation?’ A way forward for EU Consumer Contract Law‘, (2011) 7 European Review of Contract Law, 235.

7 See the website of the CFR Context Group at http://cfr.iuscomp.org; the final report will be published by Oxford University Press.

8 These are defined in Art. 150 Feasibility Study as “services related to the goods, such as installation, maintenance or repair (“the service”), whether under the sales contract or under a separate service contract which was concluded at the same time as the sales contract or provided for, even if only as an option, in the sales contract.”

9 For a fuller discussion, see Twigg-Flesner (in favour of a limitation to cross-border transactions), 246ff; Max Planck Institute (n. 5), nos. 120ff (against such a limitation).

10 H Schulte-Nölke, ‘EC Law on the Formation of Contract – from the Common Frame of Reference to the ‘Blue Button’’, (2007) 3 European Review of Contract Law, 332.

11 Similar Busch (n 5), III; Max Planck Institute (n 5), no. 122ff. But see Twigg-Flesner (n 6), 246ff.

12 Similar Max Planck Institute (n. 5), no. 99f.

13 Some parts of the Feasibility Study split provisions into B2B and B2C rules, as is the case for the control of unfair contract terms (Chapter 8 sections 2 and 3). Other parts provide specific B2B rules, but no B2C rules (Chapter 11 Section 7), which would indicate that the Feasibility Study is open to parties who are neither businesses nor consumers. Art. II.-9:404 DCFR introduced the category of a non-business (as legal persons who are not acting in a business capacity), but no similar rule has been adopted in the Feasibility Study. Similarly, Art. III.-3:105 may be explained as a catch-all provision for gaps left between B2B and B2C rules for unfair terms control; again, no similar rule has been included in the Feasibility Study.

14 As mentioned by the Feasibility Study on p. 6.

15 Max Planck Institute (n. 5), no. 75. It is argued in the same paper (nos. 76ff) that the specific conflicts rules which the Institute proposes for the Optional Instrument should otherwise follow closely the rules of the Rome I Regulation. See also Busch (n. 5), II, who believes that both options are functionally equivalent but prefers the adoption of specific choice of law rules in the Optional Instrument on the ground of legal certainty.

16 See also Busch (n. 5), IV.1.

17 See Busch (n. 5), III.2.

18 Report of the 5th meeting of the Expert Group, 30.9.-1.10.2010.

19 Report of the Working Group of 17 January 2011 (A/CN.9/716). The recent ‘European Parliament resolution of 8 June 2011 on policy options for progress towards a European Contract Law for consumers and businesses’ (A7-0164/2011) refers at no. 31 to this Working Group. See Busch (n. 5), V.

20 Contracts for the sale or encumbrance of real property, and interestingly also tenancy contracts, will frequently be subjected to the form of the lex rei sitae under Art. 11 paragraph (5) Rome I Regulation.

21 This would make the right to withdraw from a linked credit contract an overriding mandatory provision in the sense of Article 9 Rome I Regulation. This conflicts provision could alternatively be added to the substantive provision on linked credit contracts which gives this right to withdraw.

22 See above for explanations and for some alternative formulations which could be used if a different subject matter is adopted or some other choices are made.

23 This would make the right to withdraw from a linked credit contract an overriding mandatory provision in the sense of Article 9 Rome I Regulation. This conflicts provision could alternatively be added to the substantive provision on linked credit contracts which gives this right to withdraw.

© 2011 Gerhard Dannemann. This HTML edition © 2011 University of Oxford.
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