An Optional European Contract Law – Chances and Risks

1. An Optional European Contract Law – Chances and Risks Prof. Dr. Carsten Herresthal, LL.M., University of Regensburg

2. I. Introduction: Common European Sales Law – a milestone towards a common European contract law? 1. A decade without progress in European contract law? -Communication from the Commission, 11th July 2001 - COM(2001) 398 final ▪ Measures to reduce differences in contract law between Member States ▪ Reduction of obstacles to cross-border trade within the internal market ▪ „Option IV“: comprehensive legislation on the EU level, i.e. regulation with provisions on general questions of contract law and specific types of contracts -Green Paper from the Commission on policy options for progress towards a European Contract Law for consumers and businesses, 1st July 2010 - COM(2010) 348 final ▪ „Option 4“: Regulation setting up an optional instrument of European Contract Law Prof. Dr. Carsten Herresthal

3. I. Introduction: Common European Sales Law – a milestone towards a common European contract law? 2. Harmonisation of European contract law: two approaches - Communication from the Commission: “A more coherent European Contract Law: An Action Plan”, 12th February 2003 - COM(2003) 68 ▪ Improvement of the quality and coherence of European contract law by establishing a Common Frame of Reference (CFR) (CFR: common principles, terminology and model rules for the EU Legislator) -Full harmonisation of contract law: a dead end ▪ Communication from the Commission: "European Contract Law and the revision of the aquis“, 11th October 2004 - COM(2004) 651 Review of the acquis communautaire in consumer contract law, removal of inconsistencies, filling of regulatory gaps ▪ Result: Directive on Consumer Rights (adoption on 10th October 2011) Improvement of consumer rights in distance and off-premises contracts; full harmonisation, but very limited scope: information, right of withdrawal) Prof. Dr. Carsten Herresthal

4. I. Introduction: Common European Sales Law – a milestone towards a common European contract law? 2. Harmonisation of European contract law: two approaches (cont.) - Concept of an optional Common European Contract Law ▪ Substantial opposition of the Member States against the concept of full harmonisation of contract law by European directives ▪ Improvements and amendments, but no substantial expansion of fully harmonising directives in contract law ▪ Substitution of (full) harmonisation of contract law by providing for optional common contract law rules - Ultimate object of harmonisation: a binding Common European Contract Law? Prof. Dr. Carsten Herresthal

5. II. Implementation of an optional European contract Law: status quo - “Feasibility Study” (May 2011) ▪ Study carried out by the Expert Group on European contract law; ▪ Object: an optional European Contract Law for consumers and businesses -Proposal for a Regulation on a Common European Sales Law, 11th October 2011 - COM(2011) 635 final ▪ Content: Regulation (scope, choice of law), Annex I (optional contract law rules – “Common European Sales Law” - CESL), Annex II (“Standard Information Notice”) ▪ Different title but concurringsubject matter of “Feasibility Study” and “Common European Sales Law” Prof. Dr. Carsten Herresthal

6. III. Proposal for a Regulation on a Common European Sales Law 1. Content of the proposed Common European Sales Law (CESL) a) Limited scope: Sales law and related service contracts ▪ Central aspects of contract Law: Pre-contractual information and remedies in case of breach of information duty, conclusion of contract (offer and acceptance), interpretation of contract, right to withdraw, defects in consent, unfair contract terms ▪ Sales Law: Obligations and remedies of the parties to a sales contract, conformity of the goods, specific performance, termination ▪ Service contract Law: Obligations and remedies of the parties to a related service contract ▪ General provisions of the law of obligations: Withholding performance, passing of the risk, damages and interest, restitution, prescription Prof. Dr. Carsten Herresthal

7. III. Proposal for a Regulation on a Common European Sales Law b) Advantages and disadvantages - Advantages of the limited scope (Sales Law, related service contracts) ▪ Reduced complexity of the project (high complexity of a statutory law of obligations; “error-prone” process of European legislation) ▪ Sales law partially harmonised by directives (B2C-contracts) ▪ Test of a contract law of limited scope on the internal market (limited financial and personal expenses) ▪ Limited harmful effects on freedom of contract in case of an excessive level of consumer protection - Disadvantages the limited scope (Sales Law, related service contracts) ▪ Frequent application of member states law even with agreement on CESL rules (assignment, representation, legal capacity, setoff, transfer of ownership, plurality of parties, ordre public) ▪ Small progress in harmonisation: close to scope and content of aquis directives; no genuine sales law for the internal market ▪ No nucleus for a European contract law: rules close to sales law not apt for later generalisation in case of a optional common European contract law Prof. Dr. Carsten Herresthal

8. III. Proposal for a Regulation on a Common European Sales Law 2. Fundamental economic concept of CESL - Basic concept of private law: free market economy - Constraints of the concept: ▪ Limitation of freedom of contract from the beginning (Art. 1 I CESL) ▪ Multitude of mandatory rules ▪ Multitude of (mandatory) rules on consumer protection ▪ Multitude of general clauses and vague terms Prof. Dr. Carsten Herresthal

9. III. Proposal for a Regulation on a Common European Sales Law 3. Fundamental principles in private law: approval by CESL - General principles of private law in contract law: Principles substantiated by contract law rules; rules interpreted in accordance with those principles - Art. 4 I, II CESL: interpretation in accordance with “objectives and the principles underlying it“; questions unsettled by the rule „are to be settled in accordance with the objectives and the principlesunderlying it“ - General principles independent from Member States private law - Main general principles of contract law (according to CESL): ▪ Freedom of contract ▪ Primacy of non-mandatory private law rules (Art. 1 II CSEL) ▪ Good faith and fair dealing (Art. 2 I CESL) ▪ Consumer protection ▪ Principle of reliance Prof. Dr. Carsten Herresthal

10. III. Proposal for a Regulation on a Common European Sales Law 4. Main shortcomings of CESL - Very vague content of the rules: ▪ General clauses (“reasonable”; “good faith and fair dealing”; “duty to co- operate”) ▪ Vague rules embracing broad concepts (“substantially deprives the other party of what that party was entitled to expect under the contract”) - Inconsistencies (structure of the rules) ▪ General rules with non-exhaustive enumeration of examples vs. mere examples without general rule; ▪ Multitude of rights to damages vs. one general right to damages - Contradictions within the rules (e.g. three definitions of unfairness) - Insufficient structuring (e.g. Art. 45 CESL - right of withdrawal; elements of duty to inform) Prof. Dr. Carsten Herresthal

11. III. Proposal for a Regulation on a Common European Sales Law 5. CESL as a nucleus for European methods of statutory interpretation - Independent European methods of statutory interpretation: Genuine methods of interpretation in European law; CESL is European law (annex of direction) - Principle of autonomous interpretation (Art. 4 I CESL): Autonomous interpretation in accordance with its objectives and principles; no binding authority: interpretation of member states law, PECL, CISG, DCFR - Shortcoming: neither coherent preamble nor reasons by legislator Necessity due to content: coherent set of sales law rules - Approval of judge-made law (“Rechtsfortbildung”) Art. 4 II CESL: issues „not expressly settled“ are to be settled “in accordance with the objectives and the principles underlying” - Approval of lex specialis-rule (Art. 4 III CESL) Prof. Dr. Carsten Herresthal

12. IV. Chances and Risks of an optional CESL 1.Chancesof CESL - Modern Sales Law (structure adequate to the internal market) ▪ Current economic, technical structure of contractual relationships; ▪ structure of cross border trade; adequate level of consumer protection - Benefits from uniform rules on the internal market Reduction of transaction costs; entry of SME to foreign member states markets - End oftotal harmonisation End of excessive harmonisation of national contractlaw by consumer protection directives - Market for contract law Test of new contract law; development of adequate rules - Competition of contract laws Flexibility; possibility to influence member states laws Prof. Dr. Carsten Herresthal

13. IV. Chances and Risks of an optional CESL 2.RisksofCESL - Need for the 28th set of rules? Risk averse market participants (cf. opt out of CISG) - Disadvantages of EU legislation (instead of member states legislation) High demands on amendment of CESL; standstill of national contract law - Direct and indirect transaction costs ▪ Necessity for SME to provide for CESL ▪ “Decade of uncertainty” -Complexity of adjudication Limits of CESL; interaction with member states law Prof. Dr. Carsten Herresthal

14. V. Fundamental aspects of Common European Sales Law 1. Applicability of CESL in Member States legal order - Regulation (directly applicable) - Suspension of member states law in the scope of application - Trigger of applicability: agreement of the parties on CESL 2. Applicability inter partes - Agreement of the parties on the rules of CESL (Art. 8 I CESL-Directive; Opt-in by parties to the contract) - Prerequisites: ▪ Cross-border contract (habitual residence in different countries with at least one Member State) ▪ B2C or B2SME ▪ in case of B2C: consumer´s consent in explicit statement separate from contractual agreement (Art. 8 II CESL-Dir.), no standard term offer of CESL by business Prof. Dr. Carsten Herresthal

15. V. Fundamental aspects of Common European Sales Law 3. Additional options for the Member States -Availability of CESL for national contracts - Availability of CESL for B2B (no SME) 4. Amendment ofCESL rules - Two aspects ▪ Applicability of CESL ▪ Amendment of CESL-rules (as far as possible) - CESL as model rules in case of amendments by standard terms 5. Mandatory consumer protection in case of cross border contracts, Art. 6 II Dir. No. 593/2008 (Rome-I) - scientific opinion: necessity of explicit rule: possibility to deprive Member States mandatory consumer protection law - CESL-Regulation: no deprivation (CESL in both Member States) Prof. Dr. Carsten Herresthal

16. V. Fundamental aspects of Common European Sales Law 6. ECJ: Court of appeal for the interpretation and completion of CESL - Functioning of ECJ proceedings - Deficits: proceedings; capacity of ECJ; competence in private law 7. Contract law and fundamental rights - German contract law: embedded in fundamental rights legal order - Insufficient effects of EU fundamental rights ▪ No fundamental rights adjudication ex officio (on ECJs own motion) ▪ Freedom of contract: no substantial content in ECJ adjudication ▪ EU fundamental rights no „law in action“ Prof. Dr. Carsten Herresthal

17. VI. Conclusion - CESL-Regulation as nucleus of an optional Common European Contract Law - Market for contract laws - Improvements of CESL necessary Prof. Dr. Carsten Herresthal

18. Contact: Prof. Dr. Carsten Herresthal, LL.M. Attorney-at-Law (NY) Chair for Private Law, Commercial Law, Corporate Law, European Law and Theory of Law Faculty of Law University of Regensburg Universitätsstr. 31 D- 93053 Regensburg mobil +49 / (0)160 - 97861826 Tel. +49 / (0)941 - 9432631 (Sekretariat) Fax. +49 / (0)941 - 9434965 mail@carsten-herresthal.de www.carsten-herresthal.de Prof. Dr. Carsten Herresthal