Chapter 1: Introduction
Global trade rose from a little over 25% in 1970 to almost 60% in 2018. Many factors contributed to
this rapid growth. The main factors are the liberalization of trade and the sharp reduction in
transportation and communication costs over the last 30 years (ending war, reduce war spending).
Another major development in the last 30 years is the fact that the European Union, Japan and the
US have seen a decline in their shares of world exports in favour of emerging and developing
countries in Asia, especially China. The increase of the share of world exports of China is a result of
economic reforms in China making it more capitalist, trade-oriented country.
Since 2010 global trade is stalling, probably because Western countries realized that globalization
does not only produce winners. Losers are the blue-collar workers in Western countries, which saw
their jobs disappear to low-wage countries like China. Still, because of the expanding international
trade in recent years, the importance for people doing business with foreign countries of
understanding the legal implications of doing business abroad has become greater.
1.1 Risks in international trade
The success or failure of doing business abroad is determined not only by the content of the contract
of sale but also by the economic and political environment in which the transaction takes place. In a
world where the governments and economies of countries are becoming increasingly unstable it is
important not to lose sight of this changing landscape and the risk involved for companies who sell
their products abroad.
1.1.1 Political risks: the political risk in international trade can be covered by trade credit insurance.
Credit insurance not only covers commercial but also political risks. Political risk consist of three
major categories. These are risks related to:
-Foreign policy risks- including war, make it impossible to deliver goods or to get paid. Also, an
embargo against a country can result in severe economic damage for a seller who is not allowed by
his government to deliver the goods that have been sold. Although war and embargo’s constitute
possible risks, these are not the greatest risk (don’t happen very often).
The greatest foreign policy risk to individual contracts of sale is restrictions on trade. Especially in an
economic climate where most economies are facing headwinds, politicians try to protect their
national industries by implementing trade restrictions. Trade restrictions can lead to a trade war. A
trade war is an economic conflict between countries which results In extreme protectionism. In a
trade war a country enacts trade restrictions and the other country does the same. (embargo’s)
At the moment the most popular trade restrictions are so-called border measures. Border measures
are import measures such as specific duty increases, reference import values and minimum import
price setting, burdensome licensing, special border fees, tariff quotas, or import and export bans.
Another category of trade barriers are behind-the-border measures. These measures are part of
long-term policies aiming at boosting domestic industries. This is done by giving state aid, tax
advantages, local content rules of governmental preference to national companies. Other categories
of trade restricting measures are;
State aid to national companies: state aid to individual companies or sectors in the economy makes
it difficult for foreign companies to compete with their products.
Competitive devaluation: A country can decide to print more money. More money leads to a
depreciation the currency against others and it makes it cheaper for foreigners to buy products
coming from the devaluating country (you can buy more with your currency, example: 1 lira – 1 euro
 100 lira – 1 euro). This policy is very dangerous. Competitive devaluation can lead to currency
wars (1 country starts devaluating, the other follows). Printing money can also lead to high inflation
in the country printing money. (vb: Duitsland na wereldoorlog, hyperinflatie, invoering nieuwe mark)
Consumption subsidy: If a government subsidizes consumption this is bad news for producers of
competitive products. The non-subsidized product becomes more expensive relative to the
subsidized product. For example the US subsidizes the production of ethanol. Ethanol is a fuel on
which cars can run, for producers of cars which run on other fuels this can be a disadvantage.
Export Subsidy: if a country subsidizes a product which is exported, competitors in the importing
country is in a disadvantageous position: their prices will probably be higher. These measures
protect the exporting industry but hurt the industry in the importing country.
Export taxes or restriction: there are various reasons why governments aim to control the export;
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Restrictions on the sale of technology or weapons to other countries to protect national security;
Preservation of natural resources;
To encourage the supply of raw materials to local industries
Import ban: import bans are used by governments seeking to protect existing domestic industries
and reduce the country’s dependence on imports. An import ban is an advantage for domestic
producers because they can sell their products for a higher price (less competitors).
Investment measures: some countries implement a legislation which prohibits foreigners from
investing in certain industries or owing certain industries. Some countries also nationalize companies
Local content requirement: a measure which also constrains competition from foreign companies is
local content requirements. Some countries have enacted legislation requiring broadcasting stations
to use the language of the country only or for a certain percentage of time (French, French songs).
Migration measure: Governments introduce migration measures allowing fewer immigrants into the
country, to protect their own workforce. Massive immigration often causes social problems, the
people in the host country have problems to accept the people with different habits, religion and
values (also people not happy, replacing their jobs).
Other service sector measures: in recent years, States have saved a lot of banks with taxpayers
money. The Dutch government nationalized ABN AMRO and SNS Reaal, this was necessary because
the bankruptcy of the bank could cripple the financial system, but these measures still discriminate
against foreign commercial interest.
Public procurement: a lot of countries try to benefit their own industries this way. There are several
ways of doing this. So-called ‘buy local’ campaigns fall into this category. The State of Maryland
(U.S.A) enacted a ‘buy American’ bill. The bill states that with certain exemptions, a public body, city,
country or state, must require a contractor or subcontractor to use supply American manufactured
goods in the performance of a contract for:
1. Constructing or maintaining a public work;
2. Or buy or manufacturing machinery or equipment that is to be installed at a public work site;
Quotas and tariff measures: A quota limits the quantity of a certain product which can be brought
into the country, whereas a tariff is a tax making the product more expensive in the country with the
tariff. If an import quota is set too low or import tariff too high, there is a risk that the products will
be smuggled into the country. With import quotas there is also the risk of government corruption
(government can choose, products that are allowed).
Both import quotas and tariffs reduce the quantity of imports of a product, raise the domestic price
of the product, decrease the welfare of domestic consumers and increase the welfare of domestic
producers (can sell their goods at a higher price).
Sanitary measures: in order to make sure that consumers are being supplied with food safe to eat,
governments enact laws aiming to attain that goal. However, sanitary measures can also be used as
an excuse to protect domestic producers of the products.
Sub-national government measure (technical barrier to trade): since February 2013, wines and
spirits imported into China have to feature an additional laboratory test report conforming that
levels of certain chemicals are within levels permitted by existing Chinese standards, and will still
have accompanied by a certificate or conformity with Chinese legislation. This makes it more difficult
to import wine into China.
[The world Trade Organisation] Economist broadly agree that trade restrictions were one of the
main reasons for the Great Depression in the thirties. Therefore the WTO was founded to avoid such
mistakes from the past. The WTO deals with the rules of trade between nations at a global level,
which aim to liberalize trade. It is also a forum for governments to negotiate trade agreements and
place to settle trade disputes.
-Domestic policy risks- Recent civil wars in Syria and Libya show how risky it can be to trade with
certain countries. Verisk Maplecroft put together a Civil Unrest Index. The index ranks almost 200
countries in terms of exposure to protest, mass demonstrations, ethnic or religious violence. This
can be seen on page 24 figure 1.6.
Piracy: although most people think piracy is something from the 17th century, pirate attacks are still
quite frequent. These attacks pose a considerable risk to cargoes and seaman. In figure 1.7 on page
25 the countries are shown where most piracy happens.
Terrorism: the threat of terrorism is often directed less against the goods being sold than against
people working for exporting companies, extortion and kidnapping. Although the terrorism risk is
lower from attacks of radical Islamic groups in recent years, there is growing risk from other
ideological groups like Marxist groups in Colombia and India.
-Economic policy risks- a change the economic policy of a country can have a major impact on an
individual transaction, such as:
Capital controls: in certain circumstances a country institutes capital controls to stop money leaving
the country. These measures are taken in situations of economic upheaval when investors lose
confidence that they will get their money back. Every investor tries to get his money out of the
country (examples: Iceland and Cyprus page 25/26).
Nationalization: if a government nationalizes a company, in most cases it expropriates the owner of
the company. In extreme case the government does not indemnify the owners of the company or
does so only to a small extent.
1.2 Credit insurance
For protection against these risks a seller can take out a trad credit insurance. Trade credit insurance
is an insurance which protects the seller against non-payment by the buyer, for example when the
buyer is bankrupt. It the buyer does not pay, the credit insurer pays the seller an agreed percentage
of the seller’s claim. The insurer is then subrogated to the rights of the seller. The insurer can try to
get the buyer to pay the money originally owed to the seller.
Trade credit insurance is similar to another way of financing transactions: Factoring. The main
difference between credit insurance and factoring is that with factoring the seller immediately sells
his rights for payment of the goods to the factoring company. Traditional credit insurance is an
insurance against non-payment and comes only in effect when the buyer does not pay.
*Trade insurance is done by Export Credit Insurance agencies which are government owned or
private insurance companies (most transactions are insured by private insurance)
1.3 Features of credit insurance
A credit insurance has the following features:
Policy conditions are utmost importance: as with all insurance contracts, the risks covered and the
obligations of the insurer and policyholder are governed by the policy term and conditions. For a
policyholder it is therefore important to take note of these terms and conditions and abide by them.
Credit insurance never covers 100% of the risk: credit insurance policies do not exceed the cover of
85% to 90% of losses. Payment of 100% would create a moral hazard. If a credit insurance covers
100% of losses, a company which took out the insurance could decide to look less closely at the
companies they sold to.
Credit insurers have credit limit per policy, per customer and per country: like most types of
insurance, a credit insurance policy has a maximum amount of money an insurer has to pay out
under the policy, regardless of the amount of losses insured by the seller/policyholder. Debts owed
to the seller by the customer above this limit are not insured. The limit depends on the credit
insurer’s evaluation of the buyers ability to pay the bill.
Based on the political and commercial risk as perceived by the insurer, the insurer has a credit limit
per country. The political risk is rated from 1 (low risk) to 7 (high risk) and the commercial risks rated
from A (low risk) to C (high risk). A part of this list is shown on page 32 table 1.5.
Depending on the ratings, insures have a maximum of credit they are willing to insure for
transactions done with a certain country. If a country is very unstable, credit insures can also decide
not to insure. To summarize the above
1) A Policy Limit: this is the maximum amount a credit insurer is liable for under a policy, regardless
of the number of transactions and amount of losses.
2) A country Limit: this is the maximum amount a credit insurer is liable in respect of a particular
country under a policy, regardless of the number of transactions and amount of losses.
3) A credit limit for each debtor: in the case of whole turnover insurance, the credit limit is
determined by the credit insurer’s pre-established credit criteria, the credit control procedure of
the seller/policyholder, credit management experience of the seller, etc..
Credit insurance policy covers the whole turnover of the seller: in principle the insurance policy
covers the seller’s whole turnover. Credit insurance is almost never taken out on an individual buyer.
The insurance companies want to insure ‘the good, the bad and the ugly’ debtors, otherwise they
run the risk of only insuring ‘the ugly’ debts.
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A credit insurer has the right to cancel credit limits for a specific customer: a credit insurer
cancels the credit limit if het thinks the buyer is in financial trouble.
Each credit limit will specify the maximum payment term authorized for sales to the debtor:
under credit insurance, the insurer sets a discretionary credit limit (DCL) per customer of the
policyholder. This is a maximum amount of sales covered under the insurance to one specific
buyer. So, for example, the credit insurer covers sales to customer X for a maximum of €100.00.
The DCL is 100.000,- in this case.
*the level of DCL is determined by the credit insurer based on the experience the policyholder has
with the buyer, the size of the buyer’s company, recent payment experience of the buyer and credit
reports. In exceptional cases it is possible to ask for an increase in the limit of a specific customer.
Chapter 2: European Law
The legal basis for European law can be found in the Treaty on the Functioning of the European
Union (TFEU), which contains provisions on the free movement of workers, Article 45, agreements
distorting, preventing or restricting competition, Article 101, abuse of dominant position, Article
102, and the granting of State aid, Articles 107-109. The Union (TEU) form the basis of the European
Union. The main points in the Treaty on European Union are:
-
The principles and values of the European Union;
The main objectives of the European Union;
The roles of the main institutions in the European Union;
The rules of the common foreign and security policy;
The European Court of Human Rights (ECtHR) in Strasbourg and the European Court of Justice (ECJ)
in Luxemburg are two different courts which have nothing to do with each other. The Court of
Justice (ECJ) ensures the correct interpretation of European law. At the European Court of Human
Rights (ECtHR) people can complain about infringements of the fundamental rights enshrined in the
European Convention on Human Rights (ECHR).
*the ECHR secures to resident of the signatory States fundamental rights such as the right to a fair
trial and the right to family life; it also prohibits inhuman or degrading treatment or punishment. In
addition, the ECHR has been signed by more countries than just the Member States of the European
Union (Turkey and Russia, have also signed the ECHR).
2.2 Institutions of the EU
the European Union has the following institutions, amongst others, Article 13 TEU;
2.2.1 The European Parliament
The members of the European Parliament (MEPs) are directly elected for a term of five years by the
citizens of the EU Member States. The European Parliament (EP) has a maximum of 751 members (at
the moment 705, because of BREXIT). The distribution of seats is based on the principle of
“degressive proportionality”: the larger the population of a Member State, the more MEPs it has.
The minimum threshold of seat per Member Stat is set a six members, in order to ensure that the
least populous Member States are represented.
The maximum number of MEPs per country is 96. The main powers of the European Parliament
are as follows:
1. Legislative: the EP is, together with the Council of the European Union, the co-legislator of
European Legislation. First, the European Commission sends a proposal to the EP and the Council of
the European Union. The EP and the Council then negotiate concerning the draft text. Finally, the
Commission’s proposal becomes law when both the EP and Council approve it.
2. Control of the executive: The EP monitors the Commission. In order to do so the EP has the
authority to ask the Commission questions. The EP is also permitted to question the Council of the
European Union. The Commission must answer the questions; the Council does not have this
obligation. The EP can also submit a motion of censure which will, if there is a two-thirds majority,
force the resignation of the entire Commission from office (can not resign one specific member).
3. Budgetary power: the EP has to approve the budget of the EU
2.2.2 the European Council
The European Council consists of the heads of State or government of the 27 Member States, the
president of th European Commission and the President of the European Council. The European
Council meets at least four times a year to define the EU’s general political guidelines and political
priorities. The European Council does not have a legislative function.
2.2.3 The Council of the European Union
Although there is formally one single Council, the composition of the Council varies depending on
the topic. The Council consist of the various ministers who deal with that particular subject in their
own country. For example, when discussing economic and financial affairs the Council is composed
of the 27 national finance ministers. The Council drafts (together with EP) the legislation of the EU.
*The Lisbon Treaty expanded the use of qualified majority voting (QMV) in the council by having it
replace unanimity as the standard voting procedure in almost every policy area. A qualified majority
is reached when at least 55% of all Member States (with a minimum of 15 States), whose
populations comprise at least 65% of EU citizens. To block legislation, at least four countries
(representing at least 35% of the EU population) have to vote against the proposal.
2.2.4 The European Commission
The commission operates as a cabinet, an executive committee of the EU, with 27 Commissioners.
The members of the Commission are appointed for five years. There is one Commissioner per
Member State. The commissioners are bound to represent the interest of the EU as a whole rather
than their home State, unlike the ministers in the Council, who represent the interests of their
countries. The main tasks of the European Commission are:
a) The submit legislative proposals to the European Parliament and the Countries of the European
Union. Only the Commission can make formal proposals for legislation;
b) To manage the policy of the EU and to execute EU policy;
c) To verify the compliance of Member States and individuals with Community law and, if
necessary, to take measures to ensure that Community law is complied with;
d) The Commission is an important spokesperson for the European Union and negotiates on behalf
of the EU with othe countries about international trad and cooperation agreements;
2.2.5 Court of Justice of the European Union
The courts of Justice has the task of monitoring the correct application of EU law. The reason why
the European Union endeavours not only to harmonize the laws of the Member States with
directives and regulations but also to harmonize their interpretation is that even if countries have
the same law the interpretation of the can vary from country to another.
The Court for Justice of the European Union consist of the General Court and the Court of Justice.
Most cases are brought directly before the Court of Justice, which also acts as an appellate court for
the General Court. The Court of Justice decides on:
-
Appeals against judgments of the General Court;
Article 267 TFEU: in first instance on preliminary rulings;
Article 258 and 259 TFEU: in first instance on actions against Member States for failure to fulfil
obligations under European;
A member State does not comply with EU obligations, Article 258-259: If a Member State does not
comply with European Law, the Commission (Article 258), or another Member State (Article 259),
can initiate proceedings before the Court of Justice, asking the Court of Justice to order the Member
State to abide by EU law.
If the Court of Justice finds that there has been a failure to fulfil obligations, the Member State
concerned most comply with the Court’s judgment without delay. Where the Commission considers
that the Member State has not complied with the judgment, it may bring a further action seeking
financial penalties. However, the European Commission is not always successful (see page 44).
Liability of Member State for damages caused to individuals by a breach of EU law: in the joined
case C-6/90 and C-9/90 Francovich the Court of Justice stated for the first time that a Member State
is liable to pay damages if an individual incurs damage as a result of breaches of Community law for
which the State can be held responsible. The facts of the Francovich case were as follows:
As a result of the bankruptcy of his employer Mr Francovich lost 6 million lire. Unable to recover the
money from his employer, he started proceedings against the Italian State. Directive 80/987 obliged
Member States to set up a system whereby employees who did not get their wages as a result of
bankruptcy of heir employer could recover some of the money. The Italian government had failed to
transpose Directive 80/987 within the prescribed time limit (See page 44).
From Francovich and subsequent cases it became clear that a Member State is only liable to pay
damages if the following conditions are met:
1. The infringed rule of EU law grants rights to individuals. This means:
A) The infringed right in question has to be sufficiently precise and unconditional as regards the
determination of the persons entitled to the right;
B) The identity of the legal body charged with protecting that right has to be clear;
2. The breach of Eu law has to sufficiently serious to merit the award of damages.
The factors which the competent court may take into consideration when concluding it the
breach was sufficiently serious include:
- The clarity and precision of the rule breached – for example, if the wording of a directive is not
clear and can be interpreted in different ways, it might be concluded that the breach is not
sufficiently serious;
- The measure of discretion left by that rule the national or Community authorities – the less
discretion in implementing a directive there is, the sooner the Court of Justice will concluded
that the breach is sufficiently serious;
- Whether the infringement and the damage caused was intentional or involuntary;
- Whether any error of law was excusable or inexcusable – the circumstances that there is no ECJ
case law on the subject can result in an error of law being excusable;
- The fact that the position taken by a Community institution may have contributed toward the
omission – the circumstance that a Member State has a certain interpretation and the European
Commission does not object to this interpretation can result in a breach being not sufficient;
- The adoption or retention of national measures or practices contrary to Community law;
3. There should be causal link between the breach of the Member State’s obligation and the loss
and damage suffered by the injured parties.
Action for annulment, Article 263 under 2: by action for annulment under Article 263, a Member
State, the European Parliament, the Council or the Commission may seek the annulment of a
measure (regulation, directive or decision) adopted by an institution of the EU. A Member State or
European institution may also consider that another EU institution is not complying with EU law.
Action for annulment, Article 263 under 4: individuals have only limited scope to apply to the ECJ
under Article 263. An individual can only apply directly to the ECJ if his interest are directly harmed
by a decision of an EU institution. This will be the case if a legal act:
-
Is addressed to the individual;
Directly and individually affects the individual or;
In case of a regulatory act, is of direct concern to the individual;
The aim of the action for annulment is to review the legality of legal acts of the Council, Commission,
European Central Bank or any other body of the EU. This action can be brought against all legal
bindings acts of bodies of the European Union (directives, regulations and decisions). Many of the
cases involve companies who do not agree with the fines they received from the commission.
Compensation based on non-contractual liability, Article 268: if EU institutions commit wrongful
acts toward individuals, natural or legal persons may seek compensation at the Court of Justice for
the damage they suffered. The proceedings start at the General Court and the appeal of the General
Court’s decision is brought before the Court of Justice.
Preliminary ruling, Article 267: Figure 2.5 shows the nature of the proceedings brought before the
Court of Justice in 2018. The vast majority of rulings by the European Court of Justice were
preliminary rulings. It also shows that direct actions only make up a small percentage of the cases.
The main reason that there are not that many cases in which a direct action is possible. An individual
can only apply directly to the ECJ if his interests are directly harmed by a decision
of an EU institution.
EU law must be interpreted in the same way throughout the Union. Therefore, it is possible for
national courts in the Member States to refer questions to the court directly requesting preliminary
ruling on the interpretation of European law. The national court submits such a request before the
national court gives its ruling. In this way the national court can take the ECJ’s ruling into account
when giving its decision.
2.3 Other international courts
There is a wide range of courts and tribunals that hear international disputes. The European Court of
Human Rights is one of them. The European Court of Human Rights (ECtHR) and the Court of Justice
(ECJ) are two different courts which in principle have nothing to doe with each other. The Court of
Justice ensures the correct interpretation and enforcement of European legislation. The European
Court of Human Rights (ECtHR) enforces the European Convention on Human Rights (ECHR).
These human rights include:
-
The prohibition of slavery, servitude and forced labour, Article 4 ECHR;
The right of liberty and security of person, Article 5 ECHR;
The right to a fair trail, Article 6 ECHR;
The right to privacy, Article 8 ECHR;
The right to freedom of expression, Article 10 ECHR;
Under the Convention anyone who feels these human rights have been violated may start legal
proceedings against the violating State. As figure 2.7 on page 52 shows, the ECtHR has been signed
by more countries that the Member States of the European Union (EU). The EU has 27 Member
States and there are 47 parties to the ECtHR, including countries such as Turkey and Russia which
are not members of the EU.
2.3.1
UN courts
The United Nations has three permanent courts:
1. The international Court of Justice (ICJ): the ICJ is the main judicial body of the United Nations. It
acts as a world court. In accordance with international law, the Court settles disputes of a legal
nature that are submitted by States. The ICJ has jurisdiction over issues relating to the Charter of the
United Nations, the interpretation of international treaties, questions of international law, violations
of international law and the extend of compensation in the event of a violation of an obligation
under international law.
2. The international Criminal Court (ICC): has been in effect since 1 July 2002. It is a permanent
institution and has ‘the power to exercise its jurisdiction over persons for the most serious crimes of
international concern’. These crimes include genocide, crimes against humanity, war crimes and the
crime of aggression. The ICC passes judgments only concerning crimes committed after the statute
came into force, and only concerning natural persons who where aged over 18 at the time.
3. The international Tribunal for the Law of the Sea: this international tribunal is an independent
court set up by the United Nations Convention on the Law of the Sea. The convention defines the
rights and responsibilities of nations in their use of the world’s oceans, establishing guidelines for
businesses and the management of marine natural resources.
2.4 European legislation
The legal basis for the European Union law can be found in the Treaty on the Functioning of the
European Union (TFEU), and the Treaty on European Union (TFU). The TFEU contains provisions that
regulate the structure and principles of the EU. The TFEU determines and delimits the areas of
competence of the EU. The TFEU contains, for example, provisions regarding the foundation of the
EU and the internal market. According to Article 26 TFEU, the EU comprises an erea without internal
frontiers where the free movement of goods, persons, services and capital is ensured.
The TFEU also contains provisions which forbid the abuse of a dominant position. Article 102 TFEU,
and the granting of State aid. The provisions in the Treaty have direct effect. Direct effect means that
a citizen can enforce these rights in a national court. A provision from one of the Treaties has direct
effect if the provision:
-
Is sufficiently clear and precisely stated;
Is unconditional or non-dependent on any national implementing measure;
And confers a specific right for the citizen to base his/her claim on;
Vertical and horizontal direct effect: if a provision of a Treaty or other legal act, e.g. directive or
regulation, confers rights on an individual which he/she can invoke against a Member State, this is
called vertical direct effect. If a provision of a Treaty or other legal act, e.g. a directive or regulation,
confers rights on an individual which he or she can invoke against another individual (e.g. an
employee against an employer) this is called horizontal direct effect.
*The aim of a directive can be to standardize national legislation (full harmonization) completely on
a certain subject or to set a threshold which national legislation must meet (minimum
harmonization). In the case of minimum monization, a Member State may exceed the terms of the
directive in its own legislation.
The consumer Rights Directive is in part an example of standard harmonization. When implementing
the directive in their national law, all Member States must us the same definitions and give a
consumer in their national legislation a period of 14 days to withdraw from a distance or offpremises contract. A Member State does not have the right to decide to put a different
period in its law.
On the other hand, there are also examples of minimum harmonization is to be concluded by
telephone. Member States may provide that the trader has to confirm the offer to the consumer
who is bound only once he has signed the offer or sent his written consent. Member States may also
provide that such confirmations have to be made on a durable medium.
Directives can have no horizontal effect, just vertical effect. Only in very exceptional cases has the
court of Justice accepted that a directive has horizontal effect. The absence of horizontal effect of
directives is mitigated by:….
2.4.3 Regulation, Article 288 under 2 TFEU
Unlike directives, regulations have direct effect. A regulation has general application. It is binding in
its entirety and directly applicable in all Member States. A regulation does not need to be transposed
into national legislation. A regulation lays down rules of general application. A regulation has direct
horizontal and vertical effect depending on its wording.
2.4.4 Decisions, Article 288 under 4 TFEU
Sometimes a decision has general application, but a decision can also be addressed to a limited
number of named individuals. A decision is binding in entirety upon those to whom it is addressed. A
decision can have direct horizontal effect. A decision by the European Commission to fine an
undertaking for an abuse of a dominant position can be relied upon in other legal proceedings by
competitors who are victims of the abuse of the dominant position.
2.4.5 Recommendations and opinions
While regulations, directives and decisions have binding force, recommendations and opinions do
not. Recommendations and opinions are also called ‘soft law’ as opposed to binding ‘hard law’. The
European Union has numerous other ‘soft law’ instruments which exist under names like ‘common
objectives’, ‘multiannual programmes’, ‘guidelines’ or ‘policies’.
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Chapter 3: European Law, The Four Freedoms
The limits of the competences of the European Union are governed by the principle of conferral. This
means that the European Union is only allowed to act within the limits of the competences
conferred upon it by the Member States in the Treaties to attain the objectives set out therein.
Competences not conferred upon the European Union in the Treaties remain with the Member
States (see page 77).
The us of the EU competences is governed by the principles of subsidiarity and proportionality. The
principles of subsidiarity and proportionality means that outside areas in which the European Union
has exclusive legislative competence, the European Union is only allowed to act if and in so far as the
objectives of the proposed action cannot be sufficiently achieved by the Member States.
Example: the protection of the environment is very often better achieved by the European Union
than individual Member States. It is impossible for a country like Sweden, which saw its forests
destroyed by acid rain, to act upon this because the acid rain was mainly caused by emissions of
sulphur dioxide from companies in the German Ruhr area.
One of the cornerstones and probably the greatest success of the European Union is the single
market. The single European market allows the citizens of the 27 Member States to move and trade
without barriers in the other Member States. The basis of the Single Market is the so-called
‘Four freedoms’:
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The free movement of goods, Articles 28, 34-36 and 110 TFEU;
The free movement of persons, Articles 45-55 TFEU;
The free movement of services, Articles 56-62 TFEU;
The free movement of capital, Articles 63-66 TFEU;
The single European market is based on a customs union. A customs union involves two aspects of
the single market, Article 28 TFEU;
1. The prohibition of all customs duties on imports and exports and of all charges having
equivalent effect involving the trade of goods between Member States.
2. The adoption of a common customs tariff in their relations with third countries.
3.1 The free movement of goods
The Court of Justice gives a broad definition of the term ‘goods’ in the TFEU. Coins which are no
longer in circulation, works of art, electricity and gas all fall under the definition of goods. To achieve
the free movement of goods, the TFEU prohibits:
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Customs duties on imports and exports between Member States and all charges having
equivalent effects, Articles 28-30 TFEU;
The imposition, directly or indirectly, on the products of other Member States of any internal
taxtition of any kind in excess of that imposed on similar domestic products, Article 110 TFEU;
Quantitative restrictions on imports and all measures having equivalent effect, Article 34 TFEU;
Quantitative restrictions on exports, and all measures having equivalent effect, Article 35 TFEU;
3.1.1 Prohibition of customs duties between Member States
Customs duties are levies on the import or export of a product. Countries charge import duties
either to raise money for the state and/or to protect domestic producers of the imported product.
Therefor, the free movement of goods is not possible without this prohibition.
The effect of a customs duty or a charge having the equivalent effect is that the imported product
becomes more expensive than the domestic produced product.
Import tariffs on goods entering the European Union are harmonized. This means that import duties
for goods coming from outside the European Union are based on a Common Customs Tariff (CCT). It
is a uniform tariff which applies to the import of goods across the external borders of the EU. The
applicable tariff rate can be found in TARIC.
Forbidden levies:
1. A levy which applies only to imported or exported goods these levies are always in breach
of Article 30 TFEU;
2. A levy which applies without distinction to imported and domestic products. Even if a levy
applies to both domestic and imported products, other circumstances can make the levy
discriminatory and thus in breach of Article 30 TFEU;
*However, under certain circumstances a levy is allowed. These levies are only allowed if:
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The levy is for a service required under European law: Germany charged a fee, payable on
the import and transit of live animals to cover the costs of official veterinary inspections
carried out only once on the territory of Germany.
The service genuinely benefits an induvial trader: the Italian government imposed a levy on
imports and exports in order to finance the gathering of statistics about the import and
export. The Court of Justice held that the data collection was beneficial to an individual trader
3.1.2 Prohibition of fiscal discrimination
Although Article 110 TFEU allows Member States to keep their different internal tax regimes, it
prohibits discrimination using taxes between a domestically produced product and an imported
product. The difference between a customs duty and tax is that a customs duty is a charge which
has to be paid because goods cross a border. The taxes preferred in Article 110 TFEU constitute a
systematic internal system of dues applied to categories of goods irrespective of where
the goods come from.
Three types of fiscal discrimination;
- Direct discrimination: This type of discrimination is easy to identify (see page 83);
- Indirect discrimination: Some Member States tried to conceal discriminatory taxes in their
legislation (see page 83)
- Reverse discrimination: in the case of reverse discrimination a Member State imposes a higher
tax on products intended for export than on the same or a similar product sold on the domestic
market. This is extremely rare, because most of the time a country wants to export as much as
possible. It does however happen in cases of rare natural recourses a country wants to keep
for its own population.
Taxation prohibited by Article 110 TFEU: Article 110 TFEU is a supplement to Article 30 TFEU – “the
provision on the abolition of customs duties and charges having equivalent effect” – Article 30 TFEU
does not however apply to taxes or charges which are part of the internal taxation system of
Member States. Three kinds of taxation are forbidden by Article 110 TFEU:
1. Article 110 under 1 TFEU prohibits a higher tax on imported products than on similar
domestic products: this raises the question of “when products are similar”. The Court of
Justice applies two criteria to decide whether products are similar, adopting a broad approach.
To decide if the products are similar one has to look at:
a) The objective characteristics of the product;
b) Whether the products have similar characteristics and meet the same needs from the
point of view of consumers.
2. Article 110 under 2 TFEU forbids a Member State to have any internal taxation of such a
nature as to afford indirect protection to domestic products: the second paragraph of Article
110 TFEU is intended to precent any form of indirect fiscal protectionism affecting imported
products which, although not similar within the meaning of the first paragraph, nevertheless
compete with some of them even if only partially, indirectly or potentially.
*In Sweden the excise duty applicable to alcoholic beverages was based on the percentage of
alcohol, for example:
- On beverages with an alcoholic strength higher than 2.25% vol. but lower than or equal to
4.5% vol, at a rate of 7,58
- On beverages with an alcoholic strength higher than 4.5% vol, but lower than or equal to 7%,
at a rate of 11,20.
In Sweden beer is mainly a domestic product and wine an imported product. Wine has a higher
percentage of alcohol so the question is whether the excise duty affords indirect protection to
domestic product. The Court of Justice deemed wine to be in competition with strong beer and
subjected to higher taxation than stronger beer.
3. Taxes benefiting mainly domestic products: This category concerns taxes or charges which are
the same for domestic and imported products. There ar3 however circumstances in which a
charge applicable to both domestic and imported goods mainly benefits domestically
produced goods.
Relationship between Article 110 and Article 34 TFEU: Article 110 is considered as lex specialist in
respect of Article 34 TFEU. This means that cases covered by Article 110 exclude the application of
Article 34 TFEU.
Relationship between Article 110 and Article 107 TFEU: Article 110 TFEU and Article TFEU are
complementary and can be applied at the same time to a specific case.
3.1.3 Quantitative restrictions on imports
Article 34 TFEU forbids quantitative restrictions on imports and all measures having equivalent effect
between the Member States of the European Union. There are two main groups of quantitative
restrictions on imports and measures having equivalent effect. Measures which discriminate:
1. Directly against imported products (quantitative restrictions on imports): Quantitative
restrictions are measures which amount to a partial or total ban on the imports of certain goods
e.g. a quota system whereby only a certain amount of goods is allowed to be imported into a
Member State, or an outright ban on import of a certain product:
*Other examples: import licences, indications of origin and restriction on advertising.
2. Indirectly against imported products (measures having equivalent effect): Article 34 TFEU also
prohibits alle measures having the effect of a restriction on imports. This is a much more difficult
category than the first one. This involves national rules which apply to all products sold in a
Member States. These measures hinder the access of products originating from other Member
States to the market of a Member State.
Article 34 TFEU forces a Member State to accept products which are lawfully marketed in another
Member State, unless there is a justification for not accepting the product on the market. A wide
range of national laws concerning the size, weight, shape, presentation and identification of
products fall within the scope of this definition.
3.1.4 Justifications for restrictions on imports
There are two categories of defences which justify restrictions on import. The first can be found in
Article 36 TFEU and the second in case of the Court of Justice, also known as the “the rule of
reason”. A Member Sate’s measure which directly discriminates against an imported product can
only justified by Article 36 TFEU. A member State’s measure which indirectly discriminates against an
imported product can be justified by Article 36 TFEU and “the rule of reason”.
According to Article 36 TFEU restrictions on imports, exports or goods in transit can be justified
on grounds of:
- Public morality, public policy or public security;
- The protection of health and life of humans, animals or plants;
- The protection of national treasures possessing artistic, historic or archaeological value;
- The protection of industrial and commercial property;
3.1.4.1 Public morality, public policy or security: most cases regarding public morality concern
indecent or obscene items. Public policy is interpreted very strictly by the Court of Justice – In
Germany the Law on the protection of young persons provides that it is forbidden to sell or
otherwise make accessible to a child or adolescent ‘Image storage media’ (DVD, video’s) which have
not been labelled or have been labelled or have been labelled ‘not suitable for young person’s’ by
the German authorities.
3.1.4.2 Protection of health and life of humans, animals or plants: the protection of health and life
of humans, animals or plants is the most popular justification under which Member States try to
justify obstacles to the free movement of goods. Decisions of the Court of Justice make it clear that
in order to successfully justify the restriction on trade the member States must prove that:
a) The real purpose of the measure is not to protect the domestic market;
b) The measure is well founded. The Member State has to provide statistical, scientific, nutritional
or technical evidence proving the necessity of the measure;
3.1.4.3 The protection of national treasures possessing artistic, historic or archaeological value:
The TFEU does not give an exact definition of ‘national treasure’, so it is up to the Member States to
determine what ‘national treasure’ means. According to Directive 93/7/EEC, national treasures
could include (see page 91).
3.1.4.4 The protection of industrial and commercial property: the most important types of
industrial property rights are copyright, patents and trademarks. Since these rights give exclusive
rights to the owner of the right, they can pose a trade barrier to selling a product in another member
State. However the use of these exclusive rights may not constitute a means of arbitrary
discrimination or a disguised restriction of trade between Member States.
*The TFEU does not affect the existence of these rights even if they are discriminatory, but if a
product is lawfully brought onto the European market the rights of the owner of an industrial
property right are exhausted. Article 34 TFEU only applies to products legally introduced onto the
European Market.
3.2.5 Court of Justice case law (rule of reason)
The two most important cases in which the Court of justice found a breach of Articles 34 and 35
TFEU justified are:
1. The Cassis de Dijon case;
2. The Keck case;
3.2.5.1 Cassis de Dijon: in this case the Court of Justice explained that the list of justifications for
quantitative restrictions on imports in Article 36 TFEU is not exhaustive i.e. there are justifications,
mandatory requirements not found in Article 36 TFEU. These mandatory requirements relate to:
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The effectiveness of fiscal supervision e.g. to combat tax avoidance;
Defence of the consumer;
The fairness of commercial transactions;
The protection of the environment;
3.2.5.2 Keck case: the central issue of the Keck case was a French legislation which forbade the sale
of certain product at a loss in order to attract customers. This legislation aimed to protecting small
shop owners against competition from hypermarkets. The managers of two hypermarkets, Keck and
Mithouard, did not comply with this legislation and were prosecuted.
The measure could hinder intra-Community trad, since it would be possible that mor e products
would be sold in France if the product could be sold under the cost price. If this concerns products
from other Member States, the French legislation hinders intra-Community trade.
The Court of Justice found the application to products from other Member States of national
provisions restricting or prohibiting certain selling arrangements is not such as to hinder trade
between Member States, within the meaning of the definition of Article 34 TFEU, as long as those
provisions apply to all relevant traders operating within the national territory and as long as they
affect in the same manner the marketing of domestic products and of those from other Member
states. Article 34 TFEU has to be interpreted as not applying to legislation of Member States
imposing a general prohibition on resale at a loss.
3.2.5.3 Conditions for successful reliance on Article 36 TFEU or the rule of reason: three conditions
must be met for the reliance on Article 36 TFEU or the rule of reason to succeed:
1. The measure has to be proportional and appropriate: proportional means that the measure in
question has to be necessary in order to achieve objective. Appropriate means that the objective
could not be achieved by less extensive prohibitions or restrictions, or by prohibitions or
restrictions having less effect on trade between Member States.
*In other words, the means chosen by the Member States must be confined to what is actually
appropriate to safeguard the pursued objective and must be proportional to the objective. To justify
a measure that hinders the trade between Member States, the Member State has tp prove that
there is no better alternative available.
2. The measure may not be of purely economic nature: even if a measure is proportionate and
appropriate it is possible that it has a purely economic aim, e.g. to reduce public spending or to
protect a national industry or undertaking. In these cases the Court of Justice will find the
measure incompatible with Article 34 TFEU.
3. The subject must not be fully harmonized: if a subject is fully harmonize the member States lose
the right to take measures on this specific subject themselves. Harmonization will be further
explained in paragraph 3.1.8.
3.1.6 Measures having equivalent effect to a quantitative restriction
There are all kinds of measures which perhaps do not constitute a direct quantitative restriction on
imports but have the equivalent effect. The following sections look at these measures having
equivalent effect to a quantitative restriction on imports. The measures consist of:
3.1.6.1 Restriction use: in certain situations, a law restricting the use of a certain product can be a
quantitative restriction or have an equivalent effect on imports – A Portuguese law prohibited
affixing tinted films to the windows of motor vehicles. The European Commission argued that no
potential customer would buy this product knowing they could not affix it to the windows of these
vehicle, the Court of Justice agreed .
3.1.6.2 Technical regulations regarding presentation of the goods: technical requirements which
impede the free movement of goods originate from laws of Member States requiring products to
have a certain size, weight, presentation or packaging. A member State’s requirements force
manufacturers and importers to adapt their products to the rules in the member State where they
are being marketed.
*In the judgment in the Cassis de Dijon case the Court of Justice laid down the principle that if a
product is legally sold in one Member State, another Member State cannot forbid the sale of this
product in its territory. The only restrictions to this principle are:
1. If there is a justification mentioned in Article 36 TFEU (public morality, public policy or public
security, the protection of health and life of humans, animals or plants);
2. On the basis of overriding requirements of general public importance recognized by the case law
of the Court of Justice and proportionate to the aim pursued;
3.1.6.3 Veterinary or sanitary controls: the obligation to obtain an import licence is a quantitative
measure and in clear violation of Article 34 TFEU. Veterinary or sanitary controls are considered to
be measures which have equivalent effect to a quantitative restriction.
3.1.6.4 Obligation to have a representative in the importing State: the obligation to have a
representative, an office or a storage facility in the importing Member State makes it expensive,
especially for small businesses, to sell goods in that member State. This results in a negative
influence on the free movement of goods. Some Member States tried to justify this by arguing that
there was a justification in national provisions of public interest, i.e. cases of criminal liability.
3.1.6.5 Price controls: a number of measures regarding minimum or maximum prices for products,
price freezes or minimum or maximum profit margins are in breach of Article 34 TFEU:
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-
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Minimum Price: even if a minimum price is fixed for domestic and imported products and thus
makes no distraction between imported and domestic products, such a measures has an effect
equivalent to a quantitative restriction.
Maximum price: since a maximum price may have the effect that the maximum price is fixed at
a level which makes the imported product either impossible or more difficult to sell than that of
the domestic product, it is a measure having an effect equivalent to a quantitative restriction.
Minimum or maximum profit margins: a minimum or maximum profit margin, even if it applies
to domestic and imported products alike, which fails to make allowance for the cost of
importation is in breach of Article 34 TFEU.
3.1.6.6 National ban on a specific product or substance: a ban in national law on the sale of a
specific substance or product is a measure which restricts the free movement of goods. Most of the
time this concerns national bans on food deemed to be a danger to public health. To justify a ban,
the Member State must prove that there is a serious danger to public health, and that the measure
is proportionate to the goal the ban seeks to achieve
3.1.6.7 Type approval: there are products, which before they can be sold to the public, need to
meet a certain predefined technical and safety conditions. Medical equipment, cars and mobile
phones are examples of products which need to be approved before they can be sold. Europe-wide
type approval helps the single market in the EU, since the product can be sold in all Member States
after one type approval.
*However, national type approval tends to create trade barriers since diverging product standards
between Member States make it difficult for a producer to sell the same product in all Member
States. National type approval also leads to higher compliance costs since the producer has to get
the product approved by the authorities in 27 Member States.
3.1.6.8 Authorization procedure: A national system requiring a company to market goods only after
obtaining authorization constitutes measures which have the equivalent effect as a quantitative
restriction on import. Such authorization might be justified under the following conditions:
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The authorization system is based on objective, non-discriminatory criteria;
The authorization system does not duplicate controls which have already taken place in another
Member State;
The authorization system is only allowed if later controls (after the product is on market)
are ineffective;
The authorization system should not, because of its duration or disproportionate costs, cause
companies not to pursue their business plan;
3.1.6.9 Deposit-return systems: Many Member States have a return system for empty beverage
bottles in place. A consumer who buys a beverage pays a small deposit which is refunded when the
consumer returns the empty bottle. These national systems sometimes oblige producers to adapt
the packaging of their product, causing extra costs and making it difficult for small suppliers to enter
the market. Although these systems are trade barriers and fall within the scope of Article 34 TFEU,
they are sometimes justified.
3.1.6.10 Incitement to buy national products: A State-imposed obligation to make a declaration of
origin constitutes a measure of equivalent effect contrary to Article 34 TFEU. However, under
pressure of some Members States the European Union made a regulation which allows Member
States to enact legislation to make it compulsory to label the origin on dairy products
and processed meats
*In general, promotional campaigns or legislation involving origin-based labelling by a Member State
are schemes with potentially restrictive effects on the free movement of goods between Member
States and are forbidden. So encouraging consumers to buy products produced in their own country
is in breach of article 34 TFEU because it can lead to the exclusion of products from other States.
The producers “obligation to comply with legislation regarding the marking of the origin or quality
on a product” might be acceptable if:
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Consumers would otherwise be misled by the packaging;
The product has characteristics due to its production in a certain region;
The origin indicates a special place in the tradition of the region in question;
3.1.6.11 Obligation to use national language: the obligation to use a national language is a trade
barrier prohibited by Article 34 TFEU if the obligation leads to additional packaging costs. It covers
the use of the national language in technical instructions, advertising messages, warranties and
instructions for use. The obligation to use a national language prior to the sale to consumer cannot
be justified based on consumer protection grounds. It is for the national court to determine in each
individual case whether the mandatory particulars given in a language other than the language
mainly used in the Member State or region concerned can be easily understood by the consumers.
*To avoid a breach of Article 34 TFEU, the principle of proportionality gives Member States the
opportunity to adopt rules that require consumers to be informed in a way that is easily understood
by the consumer, but may not exclude informing consumers by the consumer, but may not exclude
informing consumers by other means, i.e. pictograms, design or symbols.
3.1.6.12 Restrictions on distance selling: with the increase of sales through the internet from one
Member State to another the importance of Article 34 TFEU has increased. This has led to a number
of cases being brought before the Court of Justice.
3.1.7 Export barriers
Article 35 TFEU prohibits all quantitative restrictions by Member States on exports, and all measures
having the equivalent effect. There is not much case law regarding the application of Article 35 TFEU
because Member States generally try to encourage the export of goods to other countries.
Quantitative restrictions do occur if a Member State for example tries to keep natural resources e.g.
oil or gas for itself.
3.1.8 Harmonization of legislation
The only way of removing restrictions on the free movement of goods is to harmonize the legislation
in all Member States regarding the production, sale and distribution of a product. The European
Union does this through directives. These directives have to be transposed into national legislation
within a certain period of time. There are hundreds of directives dealing with the packaging, content,
monitoring and inspection of products ranging from toys and cosmetic to medical devices and
machinery. There are two types of harmonization:
1. Full harmonization: if the production, sale and distribution of a product are fully harmonized,
Member States are not allowed to make requirements other than the requirements in the
regulation. It is not possible for Member States to justify a measure in breach of Article 34 TFEU
based on one of the grounds found in Article TFEU or in case law of the Court of Justice.
2. Minimum harmonization: with minimum harmonization, also known as partial harmonization,
only certain aspects of the production, sale and distribution of a product are harmonized. When
there is partial harmonization, Member States can still justify a measure in breach of Article 34
TFEU based on one of the grounds found in Article TFEU or in case law of the Court of Justice.
3.2 The free movement of persons
Articles 45-55 TFEU deal with the free movement of economically active persons. The free
movement of persons consist of two parts; the free movement of workers (Articles 45-48 TFEU), and
the right of establishment of nationals of a Member State in the territory of another Member State
(Articles 49-55 TFEU).
3.2.1 Free movement of workers
Article 45 TFEU states that workers are free to move within the European Union. This means that all
kinds of national legislation prohibiting workers from working in another country of the European
Union is forbidden. Any discrimination based on nationality between workers of the Members States
regarding employment, remuneration and other conditions of work and employment are prohibited.
Article 45 TFEU has a direct effect. A direct effect enables individuals to immediately invoke
European legislation before courts regardless of whether national law texts exist. Article 45 TFEU
also has horizontal effect, meaning that a worker of a Member State of the European Union can rely
on Article 45 TFEU not only against national governmental authorities (vertical effect), but also
against an employer.
3.2.2 Exceptions to free movement of persons:
1. The ability of a Member State to impose restrictions on employment in the public service for
persons with the nationality of another Member State (Article 45 under 4 TFEU). Under 51
TFEU a Member State can restrict access for self-employed persons to activities in which an
official authority is exercised.
2. The Court of Justice also accepts restrictions on the free movement of persons based on
public security, public policy or public health.
3. The measure does not go beyond what is necessary to attain the objective pursued,
i.e. is proportionate.
*France also introduced a law to protect the use of the French language. This means that employees
have the right to receive all documents which they need to do their work, e.g. their employment
contract, in French.
3.2.2.1 Employment in public service or exercising public authority: the first restriction on the free
movement of persons is based on employment in public service. Only if the activity is specifically and
directly connected with the exercise of public authority does the exception in Article 51 TFEU apply.
Activities which do not involve decision-making powers, or are preparatory or auxiliary fall outside
the scop of Article 51 TFEU.
As a result the Court of Justice held that Member States do not have the right to reserve access to
the profession of notary to their own nationals. The documents which notaries authenticate are
entered into freely by the parties and cannot be altered without consent of the parties involved so
there is no direct connection with the exercise of official authority. A notary guarantees the
lawfulness of legal documents, which Is an activity in the public interest.
Article 45 under 4 TFEU gives Member States the possibility to exclude non-nationals from
employment in public service. A Member State cannot forbid access to all its civil service positions.
Access can only be denied if the position involves the exercise of power conferred by public law ant
the holder of the position is entrusted with the responsibility for the general interests
of the Member State.
3.2.2.2 Restrictions based on public security, public policy or public health: from case law of the
Court of Justice it follows that these limitations should be interpreted restrictively. A measure taken
by a Member State has to be proportional to the objective. Mand although a Member State can
decide for itself if this exception to the free movement of persons applies in a specific case, it is up to
the Court of Justice to decide if the Member State exercised this right within the limits of the TFEU.
Member States also have to apply the procedures and respect the rights conferred on European
Citizens in Directive 2004/38.
Directive 2004/38 lays down the limits placed on the right of the free movement of persons on
grounds of public policy, public security or public health. This directive codifies the restrictive
exceptions found in case law of the European Court of Justice. A Member State can only invoke the
limitations on the free movement of persons of Article 45 under 3 TFEU:
1. If the personal conduct of a person justifies the measure: measures taken on grounds of public
policy or public security have to be based exclusively on the personal conduct of the individual
concerned. A Member State is also required to apply its laws to nationals and non-nationals in a
non-discriminatory manner.
2. Under some circumstances regarding previous criminal convictions: previous criminal
convictions don not constitute grounds for limiting the free movement of persons, e.g. expelling
criminals from another Member State
*A French national had been convicted twice in the United Kingdom for possession of illegal drugs.
The UK wanted to expel him. The Court of Justice held that the existence of a previous criminal
conviction in itself was not enough to invoke the public policy ground but could be taken into
account in so far as the circumstances which gave rise to that conviction were evidence of personal
conduct constituting a present threat to the requirements of public policy.
A finding that such a threat exists implies the existence in the individual concerned of a pattern of
behaviour to act in the same way in the future and it is therefor possible that past conduct alone
may constitute such a threat to the requirement of public policy.
3. If there is a present, genuine and sufficiently serious threat: a Member State has the obligation,
in case of an expulsion order enforced more than two years after it was issued, to check if the
individual concerned is currently and genuinely a threat to public policy or public security. The
Member State also has to obligation to assess whether there has been any material change in
the circumstances since the expulsion order was issued.
4. Non-compliance with entry and residence formalities: for periods of residence longer than
three months, the host Member State can require EU citizens to register with the relevant
authorities. However, in the case of non-compliance with the registration requirement, a host
Member State can hold the person concerned only liable to proportionate and
non-discriminatory sanctions.
5. In case of epidemics: the only diseases justifying measures restricting the free movement of
persons are diseases with epidemic potential as defined by the World Health Organization.
6. Economic grounds are not allowed: Article 27 under 1, Directive 2004/38 states that Member
State cannot invoke public, public security or public health to serve economic ends.
3.3 The free movement of services
The justifications in respect of this right are the same as the justifications of the breach of the free
movement of goods and free movement of persons. These justifications of any breach of the right of
free movement of services as with the other three freedoms, only become relevant if the first
question “Is a measure in breach of one of the other freedoms” is answered.
The freedom of establishment is part of the free movement of person and the free movement of
services. This means that a company or self-employed person based in one Member State is:
a) Free to set up an agency, branch or subsidiary in another Member State, Article 49 TFEU;
b) Free to offer services in another Member State, Article 56 TFEU;
The difference between the freedom of establishment and freedom to provide services in another
Member State is whether the stay is temporary or permanent. In case of a permanent stay in
another Member State, the freedom of establishment (Article 49 TFEU) applies. In case of a
temporary stay in another Member State, the freedom to provide services in another Member State
(Article 56 TFEU) applies. This distinction is made for two reasons:
1. The Freedom to provide services involves the legislation of two Member States – the Member
State where the service provider is established and the Member State where he is offering the
services – A service provider who is temporarily active in another Member State has to comply
with the law of temporarily active in another Member State has to comply with the law of two
different Member States, unlike a provider of services who establishes in another Member State.
2. Migration to another Member State (freedom of establishment) has a different purpose than
offering services (free movement of services) in another Member State.
3.3.1 Freedom to provide services
The freedom to provide services only applies if the freedom of establishment does not apply. The
freedom to provide services applies if:
-
-
The activity is of economic nature: the Court of Justice has a broad interpretation of the
concept of ‘economic nature’. Insurance services, medical services and sporting activities all fall
within the scop of ‘economic nature’.
The services are for remuneration: free services are excluded from the scope of Article 56 TFEU;
The services offered are of short duration: if the activity is carried out on permanent basis
Article 56 TFEU does not apply;
There is a cross-border element: for example, a service provider based in one Member State
travels to another Member State to provide his services;
3.3.2 Risks of social dumping
The employment of workers who temporarily work in other Member States so called ‘posted
workers’ can lead to social dumping. This means that foreign service providers can offer their
services for a lower price because they pay lower wages than the service providers in the Member
State where the services are offered.
Example: Carla works for a German cleaning company in Freiburg (Germany) and earns the German
minimum wage of 8,50. She is send by her employer to Colmar (France) to clean office buildings. She
is still paid 8,50, but the French minimum wage is 9,67. It is almost impossible for French cleaning
companies to compete with the German cleaning companies.
To avoid situations as described in the example the European Union created Directive 97/71/EC, also
known as the ‘Posted Workers Directive’. The directive orders Member States to implement
legislation to ensure that posted workers are entitled by law to a set of core rights in force in the
host Member States, even though the workers have a contract with the sending company and are
therefore bound by the laws of the Member States Posted workers have the same rights as workers
from the Member States regarding:
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Maximum work periods and minimum rest periods;
Minimum paid annual holidays;
The minimum rates of pay;
Health, safety and hygiene at work;
Protective measures with regard to the employment of pregnant women or women who have
recently given birth, of children and of young people;
*The issue of posted workers remains a hot issue, especially in countries with a lot of posted
workers, e.g. France, Belgium and Germany. In these countries there is a large part of the population
who feel their jobs are ‘stolen’ from them by workers coming from Eastern Europe. As a result, these
countries try to implement legislation to protect the workers in their respective countries.
3.3.3 Freedom of establishment
The restrictions on the freedom of establishment under European law are the same as the ones
which apply to the free movement of goods, of workers and of services. The first restriction can be
found in Article 36 TFEU, the second in case law of the Court of Justice.
3.3.4 Main barriers to freedom of establishment and freedom to provide services
The main groups of barriers to the freedom establishment and freedom to provide services are the:
1. Establishment and residence requirements
2. Nationality requirements
3.3.4.1 Establishment and residence requirements: most cases in this category concern the
recognition of university and other education degrees and permissions necessary to exercise a
profession. A lot of Member State if he or she had a degree from a university only let a doctor to
practise in that Member State if he or she had a degree from a university in that Member State. This
problem was solved through mutual recognition by the Member States of almost all college and
university degrees.
3.3.4.2 Nationality requirements: the obligation to have the nationality of the Member State in
order to be able to exercise a profession or operate a company in the member State makes the free
movement of persons and services impossible, therefor it is forbidden. This prohibition to
discriminate between national and non-nationals is not limited to the discrimination by the
government. Is also applies to the relationship between two induvial entities, e.g. between an
employer and an employee.
3.4 The free movement of Capital
Article 63 TFEU prohibits all restrictions on the movement of capital between Member States and
between Member States and third countries. This means an individual investor or a financial
institution from one Member State is free to grant loans in another Member State, to invest in real
estate or to buy securities, e.g. bonds and shares.
*the reason for the incorporation of the free movement of capital in the TFEU is that a free flow of
capital leads to an optimal allocation of resources and competitive European financial markets.
Since all restrictions are forbidden this covers not only direct barriers to the free movement of
capital but also measures of equivalent effect to restrictions on the free movement of capital. The
prohibition in Article 63 TFEU goes beyond the mere elimination of unequal treatment on
ground of nationality.
Exceptions to free movement of Capital:
1. Article 65 TFEU: allows member States to take all requisite measures to prevent infringements
of national law and regulations, in particular in the field of taxation and the prudential
supervision of financial institutions. Member States are also allowed to lay down procedures for
the declaration of capital movements for purposes of administrative or statistical information,
e.g. legislation against money laundering, financing of terrorism or trad in narcotics.
*Member States are also allowed to enact legislation which restricts the movement of capital, if the
restrictions are justified on grounds of public policy or public security. The Court of Justice found
that regulations of a Member State safeguarding supply in petroleum, telecommunications and
electricity sectors in the event of a crisis would constitute a public security reason.
2. Rule of reason: as with the free movement of goods, persons and services, the Court of Justice
has accepted in several cases that there can be mandatory requirements justified by a public
interest which justify a restriction on the free movement of capital. The Court of Justice found a
restriction on the free movement of capital justified:
- In case of services of general interest;
The Dutch government holds special shers in the Post and Telecom (KPN) companies, reserving to
itself special rights of prior approval of certain very important management decisions by the organs
of those companies concerning both their business and their very structure. The court of Justice held
that those special shares could have deterrent effect on portfolio investments.
A possible refusal by Dutch State to approve an important decisions, proposed would be capable of
depressing the stock market value of the shares of that company and could reduce the
attractiveness of an investment in such shares.
-
Where the aim is to protect a diversified offer of non-commercial television programmes;
To protect small agricultural farming;
For town and country planning purposes;
Conditions: the aims mentioned above can be more important than the free movement of capital,
but are only justified if the measures:
-
Pursue an aim mentioned in Article 65 TFEU or involve mandatory requirements justified by
a public interest;
Do not constitute arbitrary discrimination or a disguised restriction on the free movement of
capital, Article 65 under 3 TFEU;
Do not pursue an economic aim;
Are appropriate for the aims pursued;
Are proportionate to the aims pursued i.e. must not go beyond what is necessary in order to
attain the aim;
If the aim pursued is not (fully) harmonized in European legislation;
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Chapter 4: Competition Law
Companies can or tend to behave in ways which may distort and restrict competition: price
agreements between companies, abuse of a dominant position or agreements to divide the market
or resources of supply are just a few examples. Since one of the goals of the European Union is the
creation of a single market, such behaviours are forbidden by the TFEU. The TFEU also gives the
European Commission far-reaching powers to enforce these prohibitions. The TFEU forbids two main
categories of behaviour on the part of companies:
1. Article 101 TFEU prohibits agreements between two or more independent market operators
which restrict competition. This provision covers both horizontal agreements (between actual or
potential competitors – operating at the same level) and vertical agreements (i.e. between a
manufacturer and its distributor – operating at different levels);
2. Article 102 TFEU prohibits the abuse of a dominant position in a market by a company;
*The main difference between Article 101 and Article 102 TFEU is that Article 101 deals with
agreements between two or more companies and Article 102 deals with the behaviour
of one company.
4.1 Agreements distorting, preventing or restricting competition
Agreements which distort competition on the European market are forbidden. Article 101 prohibits:
-
All agreements between undertakings;
Decisions by associations of undertakings and concerted practices;
Which:
- May affect trade between Member States and;
- Have as their object of effect the prevention, restriction or distortion of competition within
the internal market;
4.1.1 Agreement
Agreements between undertaking comprise not only written and oral agreements but also protocols
which reflect a consensus between companies, unspoken agreements and non-biding gentlemen’s
agreements. Agreements between a company and a consumer do not fall within the scope of Article
101 TFEU, because Article 101 forbids certain agreements between undertakings.
4.1.2 Undertaking
The Court of Justice employs a wide definition of ‘undertaking’. The Court of Justice defines an
undertaking as ‘every entity engaged in an economic activity, regardless of the legal status of the
entity and the way in which it is financed’. Even in the absence of the pursuit of profit, a entity
engaged in commercial activity can be defined as an undertaking.
In most cases it is obvious if an organization is or is not an undertaking within the meaning of Article
101 and Article 102 TFEU. This is more difficult with activities undertaken or financed by the State.
Wholly or partially State-owned companies also fall within this definition of ‘undertaking’. However,
activities which fall within the exercise of public powers are not of an economic nature and should
not be considered as economic activities.
4.1.3 Decisions by associations of undertakings
Although there is no definition in the TFEU, the European Court of Justice construes the concept of
association of undertakings extensively: anybody which represents the interest of its members is
eligible to be described as an association of undertakings.
4.1.4 Concerted practices
Since agreements distorting competition are forbidden, the participants in a cartel very often do not
put their agreements on paper. This makes it very difficult to prove that there is an agreement. This
is why concerted practises are also forbidden. According to the Court of Justice, the difference
between an agreement and concerted practice is that: ‘from the subjective point of view’ they are
intended to catch forms of collusion having the same nature and are only distinguishable from each
other by their intensity and the forms in which they manifest themselves.
For the Court of Justice, the proof of a concerted practice exist if companies in a sector have the
same price policy which cannot be explained from the market structure. Secretive meetings between
suspected companies confirm a concerted practice, even if there was only one meeting. In the case
of a concerted practice the European Commission has to present evidence of three elements:
1. Contracts between competitors;
2. A meeting of minds or consensus between the parties to cooperate rather than to compete;
3. A subsequent course of conduct on the market, and a causal link between the contacts
and the course of conduct;
4.1.5 May affect trade between Member States
In essence the Court of Justice considers that it is not necessary to prove actual interference with
trade and a proof of potential effect on trade between Member States is sufficient. In order to affect
trade between Member States it must be possible to foresee with a sufficient degree of probability,
on the basis of a set of a objective factors of law or of fact, that the agreement or concerted practice
may have an influence, direct or indirect, actual or potential, on the pattern of trade between
Member States in such ways as to cause concern that it might hinder the attainment of a single
market between Member States.
Example: in Austria the Austrian banks formed the so-called ‘Lombard Network’. During meetings
the banks fixed lending and deposit rates and the fees charged for their products. The banks
defended themselves by arguing that this agreement did not affect trade between Member States
– In the view of the Court of Justice, a cartel extending over the whole of the territory of a Member
State has, by its very nature, the affect of reinforcing the partitioning of markets on a national basis
and thus might affect the trade between Member States.
Agreements which prevent, distort or restrict competition but do not affect the trade between
Member States do not fall within the scop of Article 101 TFEU. They do however fall within the scope
of national anti-cartel legislation. Every Member State has its own competition authority, which, on
the basis of national legislation, deals with companies restricting competition or abusing their
market position in their Member States.
The European commission can only fine undertakings. The vast majority of the national competition
authorities in the European union can impose fines on individuals engaged in anti-competitive
agreements. As a result, participating in a national cartel is not without personal financial risk (see
page 151). – the Netherlands Authority for Consumer can impose personal fines with a maximum of
900.000,- on managers and directors of companies who take part in a cartel.
In terms of types of infringement, competition authorities focus on horizontal agreement among
competitor’s, which account for half of all cases investigated. Competition authorities have detected
horizontal infringements in the form of price fixing, market and customer sharing and exchanges of
confidential information at most levels and for most products investigated.
The European competition authorities have also investigated a number of cases regarding vertical
anti-competitive agreements. Prominent examples ar price related anti-competitive agreements, in
particular resale price maintenance (whereby a manufacturer sets the minimum price at which a
retailer has to sell its products), and exclusive purchasing agreements that restrict the freedom of
the immediate customer to deal with other suppliers.
4.1.6 Object or effect the prevention, restriction or distortion of competition
Only if there are insufficient grounds for presuming that an agreement has an anti-competitive
object does the application of Article 101 under 1 TFEU require proof that an agreement in question
has actual anti-competitive effects. If on the other hand, it is clear that the agreement in question
has an anti-competitive object, then, according to settled case law, actual proof of adverse effects
on competition is unnecessary. It is then sufficient to show that the agreement is actually capable of
preventing, restricting or distorting competition within the internal market.
Against that background non-competition clauses incorporated in an agreement for the transfer of
an undertaking in principle have the merit of ensuring that the transfer of an undertaking in principle
have the merit of ensuring that the transfer has the effect intended. By virtue of that very fact they
can contribute to the promotion of competition because they lead to an increase in the number of
undertakings in the market in question. Nevertheless, in order to have that beneficial effect on
competition, such clauses must be necessary to the transfer of the undertaking concerned and their
duration and scope must be strictly limited to that purpose.
Only agreements which appreciably restrict competition fall within the scop of Article 101 TFEU.
Agreements of minor importance which have little impact on competition between companies do
not in general fall within the scop of Article 101 TFEU and are allowed. Permitted de minimis
agreements are generally agreements.
-
Between competitors (horizontal agreements) if the combined market share of the parties
involved is under 10%, on any of the relevant markets affected by the agreement, or;
Between non-competitors (vertical agreements) if the combined market share held by each of
the parties does not exceed 15%;
*However, it is possible that even a de minimis agreement appreciably restrict competition. National
competition authorities or the European Commission can challenge these agreements and fine the
companies involved. The minimis rules only apply to agreements which have the ‘effect’ of
restricting trade, not to agreements which have to ‘object’ of restricting trade.
4.1.7 Exemptions from Article 101 under 1 TFEU
Article 101 under 3 TFEU gives dispensation to agreements mentioned in Article 101 under 1, i.e. if
the conditions of Article 101 under 3 TFEU are met, the agreement is no longer prohibited, if it:
1. Contributes to improving the production or distribution of goods or to promoting technical
or economic progress;
2. Allows consumers a fair share of the resulting benefits;
3. Does not impose on the undertakings concerned restrictions which are not indispensable to the
attainment of these objectives;
4. Does not afford such undertakings the possibility of eliminating competition in respect of a
substantial part of the products in question;
The European Commission decides whether an agreement meets these four criteria. In the past,
parties to such agreements could ask the Commission to grant an individual exemption under Article
101 under 3 TFEU. To ease the workload of the European Commission Block Exemption Regulations
(BERs) were created. They lay down the specific terms and conditions that agreements have to
include to fall within the scope of Article 101 under 3 TFEU.
4.1.8 Punishment for taking part in cartel
Article 103 TFEU gives the Council of Minister the power to implement an enforcement system,
including the imposition of fines (also enforce). The European Commission imposes heavy fines on
companies involved in a cartel. Cartels are highly secretive since cartels are illegal. Evidence of their
existence is thus not easy to find.
Therefore the European Commission and other competition authorities have developed very
successful ‘leniency programmes’. Under a leniency programme, the first participant in a cartel to
come forward receives immunity from the penalty imposed on cartel members in exchange for the
voluntary disclosure of information regarding the cartel. Companies who acknowledge their
involvement in the cartel gat a smaller fin in return. These companies can receive reductions of up to
50% on the fine they would otherwise receive.
The fines are quite high as can be seen from Tables 4.1 and 4.2 (see pages 160-161). The maximum
fine is 10% of the overall annual turnover of the company. Figure 4.5 shows the fines imposed on
undertakings, including immunity applicants, as a percentage of global turnover.
4.1.8.1 Claims of cartel victims: victims of infringements of the EU antitrust law can claim damages
they suffered as a result of a cartel or a company abusing its dominant position. Damages can be
claimed independently or the fine imposed by the national competition authority or the
Commission. Directive 2014/104/EU on actions for antitrust damages states clearly that victims are
entitled to full compensation for the harm suffered, which includes compensation for actual loss and
loss of profit and even payment of interest from the time harm occurred until compensation is paid.
*Since Directive 2014/104/EU is a directive it has to be transposed in national legislation. The
Netherlands did this in Article 6:193k-t Dutch Civil Code.
Difficulty for victims to claim damages is the so-called “passing on defence” used by the violators of
the antitrust legislation. Sued for damages the participant of a cartel will argue that their direct
customers offset the increased price they paid by raising the prices they charge to their own
customers (indirect customers). This problem for the victims is solved by Directive 2014/104/EU. The
directive establishes a rebuttable presumption that the cartel or company abusing its dominant
position caused harm.
This means that if a company or companies infringe antitrust law and use the “passing on defence” it
is up to the infringing company or companies to prove that the claimant did not suffer damages but
that the claimant passed the increased price onto their indirect customer by raising their sale price.
In case of an indirect customer, the indirect customer has to prove that a passing-on to that indirect
purchaser occurred. In order to do that the indirect customer has shown that:
a) The defendant has committed an infringement of competition law;
b) The infringement of competition law has resulted in an overcharge for the direct purchaser;
c) The indirect customer has purchased the goods or services that were the object of
the infringement;
4.2 Abuse of dominant position
Article 102 TFEU prohibits any abuse by one or more undertakings of a dominant position within the
internal market in so far as it may affect trade between Member States. To have a dominant position
in itself is not forbidden, but if a company has a dominant position Article 102 TFEU forbids the
company to abuse it.
4.2.1 Dominant position
The dominant position of a company is determined by the following steps (see page 165). To asses
whether a company has a dominant position on a market it is essential to define the particular
market because a dominant position can only exist in a particular market.
Product market: the relevant product market is made up of all products/services which the
consumer considers to be a substitute for each other due to their characteristics, prices and
intended use. The product market is established based on market research.
If a banana seller has a 80% market share of the product market for bananas, it could be concluded
that the seller has a dominant position on that market, but if the seller only has an 80% market share
in Luxemburg and is not active in other Member States, it does not have a dominant position on the
common market – therefore it is not only the product market but also the geographic market that is
relevant to establishing if a company has a dominant position.
Geographic market: the relevant geographic market is an area in which the conditions of
competition for a given product are homogenous. In order for a company to be in breach of Article
102 TFEU there has to be a clear delimitation of the substantial part of the common market in which
the company may be able to engage in abuses which hinder effective competition.
In general, if a company abuses its dominant position in one Member State and this does not affect a
substantial part of the common market and does not hinder the trade between Member States of
the common market, European competition law does not apply. National provisions regulating
market behaviour in the Member State do apply.
There are no absolute rules to determine whether a company has a dominant position in a relevant
market, but in general a company with a market share of less than 30% does not have a dominant
position, whereas a company with a market share of more 50% does. If a company has a market shar
between 30% and 50%, key additional factors help to determine if it has a dominant position.
These additional factors are, for example, the market share of the competitors. If there are many
small competitors, dominance of the market is assumed sooner than if there are a few competitors
with large market shares. Other factors determining if a company has a dominant position are:
-
-
Fluctuation of the market share: a strong fluctuating market share held by a company suggests
an efficient market with strong competition where the company does not have
a dominant position;
High entry barriers in a market: some markets are difficult to enter. For example, the
telecommunications and utility sector because of the huge investments which a new company
has to make. Markets with high entry barriers are often monopolistic or oligopolistic markets,
where one or few companies have a dominant position;
4.2.2 Abuse of dominant position
Companies with a dominant position can exploit their customers through excessive prices and
exclude their competitors through ant-competitive practices. Some examples of these two
categories of abusive practices (exploitative and exclusionary practices) are given below:
-
Rebates;
Margin or price squeeze;
Predatory pricing;
Clauses in the contract of sale making the resale of the product impossible;
Refusing to deal with certain customers for no reason;
Exclusionary conduct;
Tying of products;
*An exploitative practice occurs when a company imposes burden or obtains benefits which it could
not impose or obtain in a competitive market. An exclusionary practise is aimed at foreclosing the
market for a certain product.
4.2.2.1 Exploitative practice
Charging excessive price: The Court of Justice defines an excessive price as a price which has no
relation to the economic value of the supplied product. Since it is very difficult to establish if the
price for a product is excessive, there is little case law about excessive pricing. A price might look
high but perhaps this is because of a temporary shortage or is a fair reward for innovation.
4.2.2.2 Exclusionary practice
Rebates: a rebate, i.e. a discount if more product or services are bought, is in itself not in breach of
Article 102 TFEU. However, the rebate has to be based on economic considerations. For example, a
company gives a rebate because the cost of producing a large amount of a certain product is
relatively cheaper than the production of small amount or the seller has lower transport costs if
more products are ordered.
Margin or price squeeze: a company with a dominant position can squeeze the competition out of
the market by using a so-called margin squeeze strategy. The company keeps retail prices lower of a
little bit higher than wholesale prices, making it impossible for other retailers to sell the product.
Predatory pricing: in case of predatory pricing a dominant company sets the prices for a long time
below cost or at artificially low prices that its competitors cannot compete with. The aim is to push
competitors out of the market. Once this has happened the company raises the prices to recoup the
losses and make a long-term profit, maintaining anti-competitive prices and thus
harming the consumer.
Clauses in the contract of sale making the resale of the product impossible: in the United Brand
case, United brand forbade its distributors to sell green bananas using a clause in its general
conditions of sale forbidding its distributors to resell its bananas while still green, to sell bananas
other than those supplied by United Brands while they were distributors of United Brands bananas
and to resell United Brands bananas to competing distributors.
Refusing to deal with certain customers for no reason: Sellers can refuse to deal with a (potential)
customer, however the seller has to have an objective reason. If a dominant company refuses to
supply a buyer of raw materials in order to stop the buyer competing on the market of the endproduct, then this is in breach of article 102 TFEU.
Exclusionary conduct: this is behaviour on the part of a dominant company by which it is trying to
abuse its dominant position by offering special discounts to customers who buy all or most of their
supplies from the dominant company or pay customers not to buy a product from a competitor.
Depriving competitors of technical information relating to a product, making it impossible for
competitors to produce competitive products: Microsoft refused to share interoperability
information with competitors, i.e. the interface information on how to ‘communicate’ with
Microsoft’s PC and server operations systems. This information is vital to viably compete in the
market for work group server operating systems and be able to bring innovative products.
Tying of products: another way a dominant undertaking can obstruct competitors in the market,
thus abusing its dominant position, is by forcing consumers to buy a product which is artificially
related to a more popular, in-demand product.
4.3 Merger control
Mergers between companies can lead to dominant positions on a market (not good for
competition). The European Union has therefore adopted Merger regulation 139/2004 (MR), giving
the European Commission supervising powers regarding concentrations with a European dimension.
The focus of the MR is not on anti-competitive behaviour but on the structure of the market. Article
3 MR defines a concentration as a change of control on a lasting basis resulting from:
a) The merger of two or more previously independent undertakings or parts of undertakings, or;
b) The acquisition, by one or more persons or undertakings already controlling at least one
undertaking, whether by purchase of securities or assets, by contract or by other means;
This definition covers mergers, takeovers and joint ventures. The MR applies to all concentrations
with a European dimension. A concentration has a European dimension if it crosses the following
thresholds. A concentration has a Community dimension if it fulfils one of the two following test. The
MR applies to concentrations if:
1. A) the combined total worldwide turnover of all the undertakings concerned is more
than €5 billion, or;
B) the total community-wide turnover of each of at least tow of the undertakings concerned is
more tan €250 million, unless each of the undertakings concerned achieves more than twothirds of its total Community-wide-turnover within one and the same Member State;
2. The combined total worldwide turnover of all the undertakings concerned is more than €2.5
billion and in each of at least three Member States, the combined total turnover of all the
undertakings concerned is more than 100 million, and:
- The aggregate turnover of each of at least two of the undertakings concerned is more
than €25 million, and;
- The aggregate Community-wide turnover of each of at least two of the undertakings
concerned is more than €100 million.
Procedure under MR: after the conclusion of a takeover agreement, the announcement of a public
bid or the acquisition of a controlling interest, the MR requires the parties involved to inform the
European Commission if the MR is applicable. A concentration may not implemented before the
European Commission has declared concentration compatible with the common market, Article 7.
Phase I: the European Commission then has several possible responses, it may:
-
Decide that the concentration falls outside the scope of the Merger Regulation;
Declare the concentration compatible with the internal market;
Declare the concentration compatible with the internal market if certain requirements are met
by the parties involved;
Decide that the concentration has serious consequences for the competition on the common
market and the Commission has doubt if the concentration is compatible with
the common market;
The European Commission has 25 working days, or 35 working days if a Member state informs the
European Commission that the concentration has an undesirable impact on the competition in the
Member State, to take a decision (no decision, allowed).
Phase II: the European Commission gives permission to around 75% of concentrations in phase I as
can be seen in figure 4.8 (blz. 177). In the remaining cases the European Commission opens an
investigation in order to decide whether or not the concentration is compatible with the common
market. The European Commission can take three possible decisions. It may:
1. Declare a concentration compatible with the common market
2. Declare a concentration compatible with the common market, but impose certain conditions
which the concentration must fulfil to be compatible with the internal market: if a proposed
merger could distort the competition, the parties can try to correct this potential effect by
selling part of the combined business for example or to license technology to another market
player. If the commitments satisfy the Commission and maintain or restore competition in the
market, it gives a conditional clearance for the merger to go ahead.
3. Declare the concentration incompatible with the common market
*The European Commission has 90 days to take a decision, a period extended to a maximum of 125
working days in complex cases. The European Commission can also ‘stop the clock’ if it feels it does
not have sufficient information from the parties involved in the concentration.
4.4 State aid, Article 107 TFEU
Aid from governments to their national companies or industries distorts competition. State aid is an
advantage in any form whatsoever given on a selective basis to undertakings by national public
authorities i.e. national or local government.
Article 107 TFEU prohibits the granting of State aid by Member States. In essence it forbids the
transfer of public money to private undertakings. State aid is forbidden by Article 107 under 1 TFEU
unless one of the exceptions in Article 107 applies. State aid is incompatible with the international
market if a measure has the following features:
-
-
-
There has been an intervention by the Member State or through Member State resources: This
intervention can take various forms, e.g. grants, interest and tax reliefs, guarantees, etc.
The intervention gives the recipient an advantage on a selective basis: This is the case if for
example the advantage is given to specific company or industry sector. If the intervention is not
selective, meaning the advantage is given to all undertakings in the same position, the
intervention is not forbidden.
The competition has been or may be distorted: if the first two conditions above are met, the
Court of Justice will in general conclude that the Member State’s measure
distorts the competition.
The intervention is likely to affect trade between Member States: even if Sate aid is given to a
company which does not export to other Member States the measure affects the trade between
Member States. If a government gives a subsidy to a national company, companies from other
Member States will have difficulty competing on the market in question.
Article 107 TFEU is closely related to Article 110 TFEU. Article 110 forbids a Member State to tax
imported products differently than products produced in the Member State itself. Both articles apply
cumulatively and are also complementary. It is for the European Commission to decide whether to
apply Article 107 or Article 110 TFEU or both in a certain case.
Exemptions to the general prohibition on granting State aid: in order for an economy to function
well, State aid si sometimes necessary. Therefore, Article 107 under 2 and 3 TFEU lists a number of
objectives in respect of which State aid may be considered compatible with the internal market.
Article 107 under 2 lists measures of State aid which are automatically allowed. Article 107 under 3
lists measures of State aid which may be compatible with the internal market and thus allowed. The
following measures are allowed, Article 107 under 2 TFEU:
-
-
Adi having a social character, granted to individual consumers, providing that such aid is granted
without discrimination related to the origin of the products concerned. As result of the transition
from analogue to digital television people in Hungary were forced to buy a decoder (state aid
was granted to supply socially disadvantaged households).
Aid to make good the damage caused by natural disaster or exceptions occurrent. The Corona
virus outbreak qualified as an exceptional occurrence because it was extraordinary and
unforeseeable event having a significant economic impact.
Article 107 under 3 TFEU lists the following four measures of State aid which might be considered
compatible with the internal market:
a. State aid given to less advantaged regions of Europe, Article 107 under 3(a) TFEU: the
European Commission can grant investment aid to companies in order to support the
development of disadvantaged regions. The regional aid guidelines define this type of region as
having a GDP below 75% of the EU average.
b. State aid to promote the execution of an important project of common European interest or
remedy a serious disturbance in the economy of a Member State, Article 107 under 3(b) TFEU:
the European Commission takes a very strictive interpretation of what a “serious disturbance in
the economy” is. In 2008 the European Commission qualified being nationalized by the
governments of many Member States.
c. State aid given to facilitate the development of certain economic activities provided that it
does not adversely affect trading conditions, Article 107 under 3(c) TFEU: the French
government was allowed to subsidize replacement services for farmers wishing to go on holiday.
This was done in order to make agricultural occupations more attractive for young people in
particular and also to help sustain paid jobs in agriculture.
d. State aid to promote cultural and heritage conservation, Article 107 under 3(d) TFEU: many of
the notifications to the European Commission in this category involve State aid given by Member
States or local governments to support the film industry. In case a Member State grants special
or exclusive rights to public undertakings, the Member stat shall neither enact nor maintain in
force any measure contrary to the rules regarding State aid, Article 106 TFEU.
Procedure to give State Aid: Member States wishing to grant State aid are under the obligation to
submit to the European Commission any plants to grant or alter aid, Article 108 under 3 TFEU. A
Member State is not allowed to put its proposed measure into effect until the European Commission
gives its final decision. There are a few exceptions to the mandatory notification to the European
Commission. Does not have to be notified in the following cases:
-
Aid covered by a Block Exemption Regulation: gives automatic approval for a rang of aid
measures defined by the commission in the Block Exemption Regulation;
‘de minimis’ aid: the European Commission does not exceeding 200,000 per undertaking over
any period of three fiscal years;
Aid granted under an aid scheme already authorized by the Commission;
From the time it has received a notification, the European Commission has three months to decide.
The European Commission can take three possible decisions.
1. There is no aid within the meaning of Article 107 TFEU, i.e. the aid measures may be
implemented;
2. The aid is compatible with EU rules, meaning that although the measure is State aid, the
European Commission does not doubt that it is compatible with EU State aid rules because its
positive effects outweigh distortion of competition.
3. The European Commission has serious doubts about the compatibility of the notified measure
with EU State aid rules. This results in the European commission opening an in-depth
investigation and the measure may not be implemented until the investigation is concluded.
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Weblecture 3: Competition law
Oftewel mededingen recht, het idee is dat er een interne markt is met vrij verkeer van goederen en
dat er geen grenzen zijn waar de consumenten last van kunnen hebben. Dit betekent dat we ook
geen oneerlijk mededingen willen hebben, waar bedrijven misbruik van maken en waar de Europese
burger de dupe van wordt.
Naast alle nationale organisatie die er zijn om te waken over eerlijke mededingen zijn er ook
Europese organisatie. De Europese commissie heeft daar de vergaande macht over om het overzicht
te houden en om daar waar nodig is te straffen.
Als het probleem grens verscheidend is dan komt dit pas in aan merken, want het is dan een
Europees probleem. De Europese commissie wordt ook ingeschakeld als er een kans is dat dit
grensoverschrijdend is.
Vb: in Oostenrijk maakten alle banken met elkaar afspraken over tarieven die ze vaststelden. In
Oostenrijk zelf was dit geen probleem, maar Europa ging zich hiermee bemoeien omdat het een
duidelijke vorm van kartelvorming was (maakte het voor andere lastiger, schermde zich af).
Artikelen die hier over gaan zijn:
Artikel 101 – samenwerking tussen bedrijven om afspraken te maken die verboden zijn, bijvoorbeeld
over de prijs. Hierdoor kan het zo zijn dat de prijzen te hoog zijn voor de consument (Kartel);
Article 101 TFEU prohibits: all agreements between undertakings (ondernemingen), and decisions
by associations (branchorganisaties) of undertakings and concerted practices (zonder afspraak met
knipoog “hoe bewijs je dit”)  Conditions for concerted practise: 1. Contacts between competitors,
2. Consensus to cooperate rather than to compete, 3. A subsequent course of conduct on the
market, 4. A causal link between the contacts an the course of conduct (meeting+change price).
Which may affect trade between Member States and have as their objective or effect the prevention
of restriction or distortion of competition within the internal market.
“wat moet je nou precies aantonen” – Als je niet echt kan aantonen dat er afspraken gemaakt zijn
om de mededingen te beperken, dan moet je kunnen laten zien dat deze effecten er wel aan vast
zitten of hoogstwaarschijnlijk zullen komen. Als er duidelijk bewijs van mededingen is dan hoef je
nauwelijks aan te tonen allen dat het misschien kan.
*Voor ingrijpen van de Europese commissie moet er wel een minimum zijn voor organisatie die
betrokken zijn binnen de markt. Als er minder dan 10% van de horizontale betrokken (alle winkels of
alle leveranciers) van de markt dan bemoeit de Europese commissie zich hier niet mee. Bij verticale
afspraken moet hier minimaal 15% betrokken – Deminimus principe (blz. 156)(geen duidelijk bewijs).
Exceptions from Article 101 (voorwaarden): 1. Improves production or distribution of goods or
promotes technical or economic progress 2. Allows consumers share of the benefits 3. Doesn’t
impose restrictions which are not indispensable to the attainment of the objectives (toevoegingen
die niet nodig zijn) 4. Does not afford the possibility of eliminating competition of a substantial part
of the products in question.
*In de praktijk worden deze afspraken vaak onderling in het geniep met elkaar gemaakt. Hierdoor is
het lastig om dit te kunnen aantonen. Daarom heeft de Europese commissie afgesproken dat als jij
de informatie aan levert de straf of helemaal kunt vermijden of hiervan de helft moet betalen.
Fine: maximum = 10% of jaarlijkse omzet.
Naast dat er…………….
Case 2:
A) The companies Kühle and Nagel didn’t had to pay the fee to the European commission. Therefore
it is logical to assume that these companies came forward to the commission.
B) ………
C) Article 102 has no effect on this case, because article 102 is about one company who dominates
and therefore can disadvantage there consumers. This case is about three companies who made an
agreement which disadvantage there consumers.
D) the maximum fee that could be imposed on Schenker would be 50 million (turnover 500 million)
Artikel 102 – als 1 bedrijf heel groot is en die vervolgens allemaal maatregelen en te hoge prijzen
oplegt voor zijn afnemers, waardoor hij hiervan alleen profijt heeft.
Hierbij is het allereerst belangrijk om te weten of er ook een duidelijke macht positie is. Om dit te
kunnen achterhalen is het allereerst belangrijk om de relevante markt bepalen, twee dimensies: 1.
Product markt – producten concurreren alleen met soortgelijke producten, 2. Geografische markt –
bakkers in Alkmaar concurreren niet met bakkers in Amsterdam. Onder een percentage van 30% van
de markt is dit geen duidelijke macht positie, boven de 50% dominante positie (daar tussen
grijsgebied, kijken naar aandeel van de rest+ kan ook kijken naar toegankelijkheid van de markt).
Daarnaast moet je ook duidelijk achterhalen of er van deze positie misbruik wordt gemaakt. Boek: 1
rebates, 2. Margin or price squeeze 3. Predatory pricing, maar ook over het niet prijs geven van
informatie (vb: Microsoft, andere programma schrijvers kunnen hierop hun product laten draaien
mits zij de informatie hiervan hebben) en het stellen van te hoge prijzen.
Verordening 139/2004 Merger control: fusies en overnames kunnen leiden tot een dominante
positie in de markt. Daarom heeft de Europese Commissie besloten dat zij bepalen of dit mag met
betrekking tot de interne markt. Dit gaat alleen over fusies die grensoverschrijdende invloed hebben
en voldoen aan de volgende voorwaardes (blz. 178).
Artikel 107 – staatsteun die door de overheid wordt verleent, als bedrijven in een bepaald voordeel
krijgen door staatsteun en alleen zij dit krijgen, dan kan er oneerlijkheid ontstaan (mag wel
staatsteun verlenen maar niet op een selectieve manier “hiervoor belangrijke reden”);
Weblecutre 1:15 -1:22 verder kijken
Weblecture 4: International trade law
1. How to sell in other countries: als we ons afvragen hoe we dan zijn er een aantal vormen die dit
kan aannemen afhankelijk van wat wij belangrijk vinden. Voordat we hier veder op ingaan is het
altijd eerst belangrijk om je af te vragen met wie je zaken doet (check credentials) en of deze
persoon ook de autoriteit (het recht) heeft om dit contract te ondertekenen.
Ways of exporting:
1. Sell directly in importing country (internet verkoop/direct aan klanten),
2. Sets up his ow company (subsidiary),
Advantage:
*Lange termijn planning is het zinnig om eerder jezelf te vestigen, dan op de korte termijn planning
waar je iets wilt uitproberen en niet weet of je daar me wilt doorgaan.
3. Use an agent in the importing country (benaderen klanten voor jouw/heeft geen relatie met klant
4. Use a distributor in the importing country (benaderen klanten voor zichzelf, verkoop aan
Distributor)
Advantage:
Disadvantage:
Verschillen in voordelen en nadelen tussen agent en distribiteur op blz. 209 – een belangrijk verschil
tussen agent en distribiteur is dat een agent vaak en 1 pitter is (kan worden gezien als werknemer),
en daarom dus bescherming verdient van het recht  Directive 86/653 beperkte regeling (minimum
harmonisation) geeft de rechten aan voor de agent ook bij de beëindiging van het contract.
*Beperkte regelingen zijn richtlijnen, die kunnen worden omgezet naar nationaal niveau dan kunnen
deze strenger worden opgenomen (in dit geval meer rechten voor agents).
De agent en principaal (exporteur) zijn verplicht om elkaar zo goed mogelijk te informeren. De agent
moet alle informatie krijgen over de producten en klanten die de principaal heeft en dit moet
worden betaald. Als de order niet doorgaat moet de principaal dit duidelijk toelichten waarom niet.
De agent moet ook altijd betaalt worden als dit binnen zijn gebied valt (vb: verkoper verkoopt buiten
zijn rayon, geen 100% commissie deel afstaan) – recht op een deel van commissie als dit onder het
gebied valt van de agent van een bepaald product).
De agent is aan de andere kant verplicht om de deals te sluiten, alle informatie hierover te delen,
informatie over de liquiditeit van de afnemer (of hij dit kan betalen) en mag ook geen contracten
afsluiten met mensen die dit niet kunnen betalen.
(kijk in het boek voor waarom beschermt moet worden, anders kijk weblecture vanaf min 18)
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Chapter 5: Entry Strategies
There are several reasons why a company starts exporting their products. The main reason is to get a
bigger market for products which have proved to be popular in the home market of the company.
Another reason can be that the export results from a profitable business relationship with a buyer
from another country. There are four main ways of exporting to another country:
-
Sells directly in the importing country
Sets up his own company (subsidiary) in the importing country
Uses an agent in the importing country
Uses a distributor in the importing country
The main advantages of directly selling products in other countries are:
*Better knowledge of a foreign market: this can be important because it enables the exporting
company to change its marketing strategy if there are changes in the foreign market.
*Possibly higher profits: the profits for the company can be higher because the company does n9ot
have to pay intermediaries.
*Faster feedback: since it is in direct contact with its foreign customer, the exporting company gets
direct feedback on the performance of its products and potential quality issues.
The main disadvantages of direct selling products in other countries are:
*Understanding import laws and regulations: The law and regulations regarding imported products
vary from one country to another and depending on the kind of product, it is sometimes difficult to
deal with a rapid change in a country’s import regulations.
*Increased costs: If a company starts exporting, this means higher costs. Representatives of the
company have to travel abroad and shipping goods to the importing country is probably more
expensive that the shipping costs on the domestic market. The increase in costs is even greater if a
company creates a subsidiary in another country (long-term financial commitment).
*Accountability: the exporting company will be held directly accountable by its customer. This can
be an advantage (faster feedback), but also a liability since there is no buffer.
*Cultural differences: not only does the way people do business vary from one country to another
there are also cultural preferences for products or even the colour of products.
*After-sales might be difficult: resolving problems with a product remotely might not be possible, or
even require a visit to the customer. Depending on the product, the after-sales service may also
require a knowledge of the local language when customer speak their own language.
The main advantages of indirectly selling of products, i.e. through an agent or distributor, in
other countries are:
*Limited investment: for the export of products to another country, a relatively small investment is
necessary if the exporter decides to work with an agent or distributor. The financial risks are
therefore lower with this entry strategy.
*Market knowledge of the agent or distributor: a good intermediary has a knowledge of the market,
potential clients, local competitors and contracts to sell the product to.
*Customer service: the exporting company can turn over the responsibility for customer service to
the intermediary. This results in less administrative obligations and allows the exporter/
manufacturer to focus on his core business.
The main disadvantages of indirect selling of products in other countries are:
*Less profit: since the company has to pay the agent or distributor, the profit margin wil likely be
lower than with the direct slae of the goods.
*Less knowledge of the foreign market: if a company sells through a distributor or an agent, the
exporting company has less knowledge of the market structure and its clients. As will be explained
below, this is more the case if he uses a distributor as opposed to an agent.
*Less knowledge of the product: an intermediary is, at least at the beginning of the relationship, less
familiar with the product than the exporting company. In particular, distributors often also distribute
competing products. In this case it is less important for the distributor to sell the product
of a specific exporting company.
5.1 Agent
Under normal circumstances, a person only has rights and obligations under a contract if he is a
party to the contract. An exception is the concept of agency. An agent represents a principal and
enters into contracts on behalf of the principal. Thus the principal enters into the contract
with a third party.
Directive 86/635/EEC. This Directive gives minimum harmonization of the rights of the agent on
termination of the contract. The Directive only applies to self-employed agents engaged in arranging
contracts between principal and third parties for the sale of goods. Since the Directive gives
minimum harmonization, its implementation varies slightly from one legal system to another (some
have greater protection than others).
5.1.1 Obligations on the principal: the principal must act dutifully and in good faith, Article 3
Directive 86/635. This means in particular that the principal must:
1. Provide his commercial agent with the necessary documentation relating to
the goods concerned;
2. Obtain for his commercial agent the information necessary for performance of the
agency contract;
3. Inform the commercial agent within a reasonable period of his acceptance, refusal and any nonexecution of a commercial transaction which has procured for the principal;
4. Pay commission to the agent;
The agent is not only entitled to commissions for his transactions he secures for the principal or with
buyers he has previously acquired as customers for transactions of the same kind. The agent is also
entitled to a commission when there is a transaction between the principal and a buyer directly:
-
Where the agent is entrusted with the specific geographical area or group of customers, or;
Where he has an exclusive right to a specific geographical area or group of customers, and
where the transaction has been entered into with a customer belonging to that area or group;
So, if someone buys goods from the principal directly and has never, at the time or in the past, been
in contact with the agent, the agent is still entitled to commission if the customer comes from the
specific area or group of customers. According to Article 7 Directive 86/635, Member States have to
include in their legislation one of the possibilities that were referred to in the above two indents.
5.1.2 Obligations on the agent: as part of his activities, a commercial agent must look after his
principal’s interests and act dutifully and in good faith, Article 3 Directive 86/653. This means
particularly that the agent must:
1. Make proper efforts to negotiate and, where appropriate, conclude the transactions he is
instructed to take care of;
2. Communicate to his principal all the necessary information available to him;
3. Comply with reasonable instructions given by his principal;
The first and second obligations are formulated in such a way that in practise the give little guidance.
It is therefore advisable to specifically define these obligations in the agency contract.
Article 4 under 2(c) Directive 86/653/EEC states that an agent must comply with reasonable
instructions given by his principal. Article 18 Directive 86/653/EEC makes it clear that an agent will
not be entitled to compensation or indemnity (alternative to compensation) under the Directive if
the agency agreement has been terminated by the principal because of the agent’s default, which
justifies immediate termination of the agency agreement because of the agent’s failure to carry out
all or part of his obligations under the agreement.
*If the principal is not able to show such default by the agent, then the principal will have wrongly
terminated the agency agreement and can expect a significant claim under the Directive.
5.1.3 Termination of an agency contract: by terminating the agency contract, the principal avoids
having to pay commission to the agent in future. The protection for the agent drives mainly form the
principal’s obligation to end the agency contract with a notice period and in most legal systems to
pay a compensation for the termination.
It is possible to choose the law applicable to the agency contract. However, a principal may find itself
faced with a claim from an agent whose contract is terminated brought under the laws of the
territory in which the agent acted, irrespective of there being a clause in the agreement to the
contrary. This will be the case if the law of the country in which the agent has his territory gives him
greater protection than the law agreed upon in the agency contract.
5.1.4 Notice period: an agency agreement can be for a fixed period, e.g. for one or three years. After
this period, the agency agreement ends. A principal does not have to give notice unless there is such
a clause in the agency contract. An agency agreement for a fixed period cannot be terminated
before the end of the fixed period unless there is provision providing a notice period.
*Article 17 Directive 86/653 not only if the agency agreement is terminated by the principal but also
if it ends after the fixed period.
According to Article 15 under 2 of Directive 86/653, the notice period for an agency contract running
for an indefinite depends on how long the agency contract has existed.
Duration agency contract Minimum notice period Article 15 under 2 Directive 86/653 and
Article 7:437 under 2 BW
1 year 1 month
2 years 2 months
3 years and longer 3 months
The parties may not agree on a shorter notice period. Directive 86/653 gives minimum
harmonization therefore, according to Article 15 under 3 Directive 86/653, Member states may fix
the notice period at four months for the fourth year of the contract, five months for the fifth year
and sixth and subsequent years.
5.1.5 Compensation for termination: Most legal systems give the agent the right to compensation
for damage suffered when an agency contract is terminated. The amount of damages varies from
one country to another. Article 17 of Directive EC 86/653 gives Member States the choice between
two systems for calculating compensation of termination.
In the first system the agent receives indemnity to the extent of the benefit he has brought tot the
principal, Article 17 under 2 EC 86/653. In the decision Turgay Semen/Deutsche Tamoil the Court of
Justice explained how compensation should be calculated. The Court distinguishes three phases:
1. The principal’s benefits from the transactions with customers brought in by the agent have to be
quantified, Article 17 paragraph 2 under a EC 86/653. The principal’s benefits are calculated by
taking the agent’s average annual remuneration over the preceding five years (less, average for
the period). Money paid by the principal to the agent to cover advertising costs and logistical
cost are left out of the calculation of the remuneration.
2. The adjustment of that amount is assessed to ensure the fairness of the indemnity, considering
all the circumstances of the case and in particular any commission lost by the commercial agent.
Fairness can increase or reduce the amount determined in the first phase.
3. Testing whether the calculation of the two previous stages does not exceed the amount of one
year’s commission mentioned in paragraph 2 under b of Article 17 EC 86/653.
The second system is the system where the agent is indemnified for the damage he suffers as a
result of the termination of the agency contract, Article 17 under 3 EC 86/653. The United Kingdom,
Belgium and France choose this system. In this system there is no maximum amount of damages the
principal has to pay.
*Overriding mandatory provisions are provisions in Belgian law, for example, which have to be
observed, even though the law of another country applies to the case. The only way to avoid Belgian
law is to agree to the jurisdiction of a court in another country and that also the law of that other
country applies to the contract.
According to Article 17 of Directive 86/653, an agent has the right to compensation if the principal
terminates the agency agreement (brings a lot of business, has to pay a lot of commission). To give
the agent some protection, the Directive states that the agent is entitled to compensation if the
agent has brought the principal new customer or has significantly increased the volume of business
with existing customers.
5.1.6 Damages: a party of the agency agreement is entitled to compensation for the damage he
suffers as a result of wrongful termination or a notice period which is too short, Article 17 under 2(C)
Directive 86/563. When a principal wrongfully terminates an agency agreement or gives a notice
period which is too short, the agent can sue for damages which entail either:
-
The amount of commission which he would have received if the agency agreement had not
ended prematurely; or
Compensation for the damage the agent suffers as a result of the termination of his relations
with the principal.
The principal who terminates the agency agreement without the proper notice has to pay damages
to the agent, Article 18 Directive 86/653, unless:
-
The principal terminated the agreement because of default attributable to the commercial agent
which would justify immediate termination of the agency contract under national law.
Where the commercial agent has terminated the agency contract, unless such termination is
justified by circumstances attributable to the principal or on grounds of age, infirmity or illness
of the commercial agent in consequence of which he cannot reasonably be required
to continue his activities.
-
With the agreement of the principal, the commercial agent assigns his rights and duties under
the agency contract to another person.
5.1.7 Restriction in trade: a restraint of trade clause is a clause which prevents an agent from selling
products from competing producers after the end of the agency agreement. This clause is very
burdensome for an agent. Therefore, Article 20 Directive 86/653 limits the possibility of including
such a clause into an agency contract. According to Article 20 Directive 86/653, a restraint of trade
clause shall be valid only if and to the extent that:
a) It is concluded in writing; and
b) It relates to the geographical area or the group of customers and the geographical area
entrusted to the commercial agent and to the kind of goods covered by his agency
under the contract.
A restraint of trade clause shall be valid for not more than two years after termination of the agency
contract. Under Directive 86/653, Member States of the European are allowed to have stricter
legislation, e.g. a restriction of trade clause valid for not more than one year (Netherlands).
5.2 Distribution agreement
A distinctive feature of a distribution agreement is that the distributor buys goods at a discounted
rate from the principal and then sells the goods in the distributor’s own name and for distributor’s
own account. With a distribution contract, the distributor sells the goods at his own expense and risk
and in his own name. The risks of not selling the goods comes here also into place.
The risk of not selling the goods is for the distributor. An agent does not run the risk. An agent is
mediator between the exporter and the buyers. A distributor will generally ask for a higher
commission than an agent became he runs a higher risk than an agent.
Unlike agency contracts, in most countries there are no specific laws regulating distribution
agreements. Distribution agreements can however qualify as term contracts. A term contract is a
contract with a specific duration. The duration can be indefinite but also be for number of years. A
contract qualifies as a term contract if the parties:
1. Commit to continuous performance, or;
2. Enter into a series of performances, which extend over a longer period of time;
5.2.1 Distribution and Competition law: Article 101 TFEU prohibits all agreements between
undertakings, decisions by associations of undertakings and concerted practices which may affect
trade between Member States and which have as their objects or effect the prevention, restriction
or distortion of competition within the internal market.
European competition law excludes the agency contract from the scope of Article 101 TFEU. In case
of genuine agency agreements, the obligations imposed on the agent as to the contracts negotiated
and/or concluded on behalf of the principal do not fall within the scope of application of Article 101.
*The key factor to asses the applicability of Article 101 TFEU is whether the financial or commercial
risk is borne by the agent in relation to the activities for which he has been appointed as agent by
the principal. If an agent bears commercial risk (not getting paid), the agent is not a genuine agent.
Article 101 TFEU forbids so-called ‘vertical agreements’ which distort competition. A vertical
agreement is an agreement between two parties in different stages of the distribution (for example
between producer and importer). Article 101 TFEU only applies to agreements between companies,
so agreements between a company and a consumer are excluded. Examples of distribution contracts
distorting competition include:
Exclusive distribution: are agreements whereby the supplier agrees to sell its products to only one
distributor for resale in a particular territory or for resale to a particular class of customers. In such
agreements, distributors are usually also limited in their active selling into other exclusively allocated
territories. Such agreements may reduce intra-brand competition and lead to market partitioning.
Selective distribution contracts: in these agreements, the seller sells only to buyers that meet
certain criteria: quality criteria regarding knowledge of the product, service or furnishing of the shop,
or quantitative criteria, for example not more tan one dealer per district.
Authorized distributors are restricted in their sales possibilities as they are not allowed to sell to
other non-authorized distributors, leaving them free to sell only to other authorized distributors and
final customers. Such agreements may reduce intra-brand competition.
Franchise agreements: are vertical agreements containing licences of intellectual property rights. In
particular trademarks and know-how for the use and distribution of goods or services. In addition to
the licence, the franchisor usually provides the franchisee, during the life if the agreement, with
commercial or technical assistance. In addition to the provision of the business method, franchise
agreements may contain a combination of vertical restraints concerning the sale of the products
concerned, such as selective distribution, non compete obligations, exclusive distribution.
As explained, Article 101 TFEU forbids entering into contracts which distort competition. In principle,
all exclusive and selective distribution systems distort competition. Selective distribution generally
does not distort competition in case where the selective distribution system is based on purely
qualitative criteria and there is an objective justification for the qualitative criteria.
From the Court of Justice decision in the case of Pierre Fabre Dermo-Cosmétique SAS, it follows that
this is the case if the following three cumulative conditions are met:
1. The nature of the product which is sold through a elective distribution system justifies a selective
distribution system, i.e. it is necessary to guarantee the quality or the correct use of the product;
2. Distributors have to be chosen on the basis of objective criteria, without discrimination, which
are laid down uniformly for all distributors and are available for, and applied to all;
3. The criteria which are laid down in the selective distribution agreement do not go beyond
what is necessary;
The Court of Justice repeated that agreements constituting a selective distribution system
necessarily affect competition in the common market. Such agreements are to be considered, in the
absence of objective justification, as ‘restrictions by object’. However, a selective distribution system
si compatible with European Union law to the extent that resellers are chosen based on the three
criteria mentioned above.
The qualitative criteria that producers use in selecting their distributors include requirements
regarding the decoration of the store, technical support, training of the staff and after-sales service.
Examples of products which are distributed through selective distribution systems include cars,
computers and cosmetics.
Even if a vertical distribution agreement distorts competition, it is not always forbidden. Article 101
under 3 TFEU gives four conditions under which a competition distorting agreement is allowed.
These four conditions are:
-
The agreement contributes to improving the production or distribution of goods or to promoting
technical or economic progress; and
The agreement makes sure that consumers have a fair share of the resulting benefit; and
The agreement does not impose on the undertakings concerned restrictions which are not
indispensable to the attainment of these objectives; and
The agreement does not afford such undertakings the possibility of eliminating competition in
respect of a substantial part of the products in question.
*The conditions are cumulative, i.e. for an agreement to be allowed all 4 conditions have be fulfilled.
European Commission Regulation 330/2010 concerns the application of Article 101 under 3 TFEU.
Regulation 330/2010 gives categories of vertical agreements and concerted practices that meet the
criteria of Article 101 under 3 TFEU and thus are allowed. This regulation is also known as the Block
Exemption Regulation (BER). The BER applies to vertical agreements concerning the sale of all kinds
of goods and services.
According to Article 3 Regulation 330/2010, the exemption applies on condition that the market
share held by the supplier does not exceed 30% of the relevant market on which it sells the goods or
services, and the market share held by the buyer does not exceed 30% of the relevant market on
which it purchases the contract goods or services.
Article 4 Regulation 330/2010 gives a list of so-called hardcore restrictions. If one of the hardcore
restrictions is included in the distribution agreement, the entire agreement is void. Forbidden
hardcore clauses in a distribution contract, Article 4 Regulation 330/2010, are:
1. The restriction of the buyer’s ability to determine its sale price: a minimum or a fixed resale
price is not allowed. The supplier is allowed to impose a maximum sale price or recommend a
sale price. In some cases, a fixed resale price fulfils the conditions of Article 101 under 3 TFEU
and is allowed (see page 230).
2. The restriction of the territory into which, or of the customers to whom, a buyer party to the
agreement may sell goods or services: an example is Nike. The company received a 12.5 million
fine for restricting out-of-territory sales by sellers of their licensed products. In this case for
example FC Barcelona and Inter Milan give Nike permission (a license) to sell products with their
trademarks on them. The football clubs receive compensation from Nike for the
use of their trademarks.
However, the following four territorial restrictions are allowed:
a) ….
A contractual clause which de facto prohibits the internet as a method of marketing has as its object
the restriction of passive sales to end-users wishing to purchase online and located outside the
physical trading area of the relevant member of the selective distribution system. On this clause the
block exemption does not apply and the clause is in breach of Article 101 TFEU.
*The internet is a threat to a selective/exclusive distribution systems, because online sales do not
respect borders of districts or countries. A German buyer can easily buy perfume in Italy or
France via the internet.
Requiring a distributor to have at least one physical trading area in which he sells the products is
allowed. It is thus possible to exclude ‘online only’ resellers from a selective distribution system. A
producer cannot restrict the sale of its products via the internet by the distributors which are part of
the selective distribution system. Formulating quality criteria which online sellers have to meet if
they want to sell online is allowed.
This was recently confirmed by the Court of Justice in the Coty/Germany case in which the Court
that a selective distribution system for luxury goods does not breach the prohibition of agreements,
decisions and concerted practices laid down in EU law. Provide that the following conditions met:
i.
ii.
Resellers are chosen on the basis of objective criteria of a qualitative nature, laid down
uniformly for all potential resellers and not applied in a discriminatory fashion; and
The criteria laid down must not go beyond what is necessary;
A contractual clause which prohibits authorized distributors of a selective distribution network from
using third-party platforms e.g. Amazon and eBay for internet sales of these luxury goods is allowed.
Provided that the following conditions are met:
i.
ii.
iii.
The clause has the objective of preserving the luxury image of the goods in question;
It is laid down uniformly and not applied in a discriminatory fashion; and
It is proportionate in the light of the objective pursued;
3. The restriction of cross-supplies between distributors within a selective distribution system,
Article 4 under d Regulation 330/2010: selected distributors are free to purchase the contracted
products from other appointed distributors within the network, operating either at the same or
at a different level of trade. Consequently, selective distribution cannot be combined with
vertical restraints aimed at forcing distributors to purchase the contract products
exclusively form the producer.
4. The restriction of the buyer’s ability to sell components as spare parts to end-users or to
repairers not entrusted with the repair or servicing of its goods (Article 4 under e Regulation
330/2010): agreements that prevent or restrict end-users, independent repairs and services
from obtaining spare parts directly from the manufacturer of those spare parts are forbidden.
An agreement between a manufacturer of spare parts and a buyer that those parts into its own
products (original equipment manufacturer (OEM)), may not, either directly or indirectly,
prevent or restrict sales by the manufacturer of those spare parts to end-users.
5.2.2 Obligation distributor to admit resellers
5.2.3 Tips for exporters
To avoid legal problems with the European Commission or national competitors, authorities,
exporters must make sure:
-
To have clear and unambiguous qualitative and/or quantitative selection criteria
for new distributors;
In case of a selective distribution system, that it has clearly analysed and documented guidelines
In case of a selective distribution system, that in practice it is also applied strictly, objectively and
in a non-discriminatory way;
5.2.4 Duration and termination of distribution agreements
As explained before, in most legal systems there are no laws for the termination of a distribution
agreement. This results in general in two difficult points in distribution contracts if they are
not dealt with in the contract:
-
The termination term of the agreement;
The amount of damages which have to be paid on termination of the agreement;
In most legal systems, there is a difference between recission and termination of a contract. In case
of recission, one of the parties to the agreement does not abide by the contract. For termination of a
contract there does not need to have been non-compliance with an obligation of the agreement.
3.2.4.1 Freedom to terminate a distribution agreement
Looking at the different legal systems in the world, there are four main categories es for termination
of a distribution contract. In some legal systems, no damages have to be paid at the end of
distribution contract. Hungary, the Untid Kingdom, Sweden and Slovakia have this system. In these
countries there is no specific legislation regarding distribution agreements and a distributor does not
have the right to damages if the distribution agreement is terminated.
3.2.4.2 Reasonable termination period
In countries such as France, Italy and Netherland, parties can terminate their distribution agreement
after a reasonable period. In these countries, there are no specific laws regulating distribution
contracts, but termination period has to be reasonable. At the end of the contract the distributor
does not have the right to be paid for goodwill.
As in the UK, courts in the Netherlands have held that a ‘reasonable notice period’ should be
observed as a termination period. How long this reasonable period is in a given case depends on all
the circumstances of the case. These circumstances include:
-
The investments made by the distributor and as a result of the termination that he will be
unable to recoup;
The duration of the agreement;
The duration of the notice period;
The nature of the agreement;
The degree of importance of the relationship in financial terms for the distributor;
The expectation of the parties regarding the continuation of the agreements;
The grounds for termination;
5.2.4.3 Rules regarding the termination of an agency contract also apply to the termination of a
distribution agreement
Spain and Germany opted for this system. The distribution is entitled to be indemnified if the
distribution contract ends because the principal/exporter has acquired new customers and derives
considerable benefit form this increased customer based. According to Article 89, the maximum
indemnity is to be calculated on the basis of average yearly remuneration obtained by the
distributor during the five years preceding the termination of the contract. If the contractual
relationship has not lasted for five or more years, the complete duration of the relationship is to
be taken into consideration.
3.2.4.4 Distribution agreements in law
Belgium is one of the very few countries to have specific legislation regarding the termination of
distribution agreements. This is the Unilateral Termination of Exclusive Distribution Agreements for
an Indefinite Term 1961 Act. This law gives substantial protection upon termination, in certain
circumstances, to distributors engaged in a contract for an indefinite period. Under this Act, when a
distribution agreement is terminated, the distributor is entitled to compensation for lay-off costs,
goodwill, and certain marketing and additional costs.
Chapter 6: General Conditions of Sale
Obligations and rights are not only derived from the content of the contract but also from treaties,
European Law, national law and standard terms and conditions. Regarding contracts of sale,
standard terms and conditions are also known as general conditions of sale. These standard terms
are made either by the buyer and/or seller, or by an industry organization.
They contain standard contract clauses, e.g. choice of law, choice of jurisdiction and limitation of
liability, and are advantageous for the user of the general conditions of sale. Therefore a seller will
try to make sure that his general conditions apply to the contract of sale and the buyer will try to do
the same. Two problems often arise with general conditions of sale (GCS):
6.2 Do CGS apply to the contract
The United Nations Convention on Contracts for the International Sale of Goods (CISG) is a UN treaty
signed by 94 countries as 1 January 2020. The CISG tries to unify contract of law for the international
sale of goods (see chapter 8). In the CISG, the question of whether CGS apply to a contract is not
explicitly answered. The CISG does state, however:
“Questions concerning matters governed by this Convention which are not expressly settled in it are
to be settled in conformity with the general principles on which it is based or, in the absence of such
principles, in conformity with the law applicable by virtue of the rules of private international law”
According to the CISG, the answer to this question must be found in the national law applicable to
the contract. This is problematic, since the answer varies from one legal system to another. In
international trade, the seller very often refers to his GCS with a standard statement that: for the
delivery of our goods and/or services, our CGS applies”.
Is this enough to bind a buyer to these conditions? A legitimate question, since these conditions are
very often tot the advantage of the seller and the buyer often does not read them. In Belgium, the
courts have ruled that reference to the CGS by the seller is enough to bind buyer to them.
In the Netherlands, court rulings on the issue are dived but there have been at least four court
rulings in 1009 and one in 2012 in which courts followed the reasoning of the German Supreme
Courts and required the user to transmit the entire text of the GCS. However, there are also court
rulings in which the district court ruled, the making the GCS available for downloading is enough.
Dutch law has extensive rules on GCS, but these rules do not apply to international contracts, Article
6:247 under 2 Dutch Civil Code, unless parties explicitly agree to their application.
For CGS to apply, either a clear reference to the forum in the contract of sale or by way of a physical
exchange of the GCS or some other means of advice which is customary in the specific trade is
required. The reason for this strict approach to jurisdiction clauses lies solely in the protective nature
of Article 25 of the Brussel I recast Regulation. Article 25 requires that the jurisdiction clause is
subject to mutual consent between the parties in order to have affect.
*This requirement must also be met when parties ar involved in an ongoing business relationship
which is based on the FENEX conditions. Repeated references to the FENEX conditions, in which a
jurisdictional clause is included, are insufficient to establish this mutual consent. If a company wants
its CGS to apply to a contract it is advisable to:
-
always send the full text with the offer, while stating that no other GCS are accepted;
if the company only refers to the GCS, refers to them during negotiations;
6.2 which GCS apply to a contract
A problem related to the application of the GCS to the contract is which CGS apply to the contract. A
seller states in his offer: “my GCS apply to the contract”, and the buyer in his acceptance states the
same. The question arises as to which GCS apply to the contract, the GCS of the seller or that of the
buyer. This is called a battle of forms, and the answer differs from one legal system to another.
There are three solutions to this problem:
1. First shot rule
This means that the GCS that apply to the contract are those of the party who is the first to say: “my
GCS apply”. The Dutch legislator choose this solution in Article 6:225 under 3 Dutch Civel Code.
2. Last short rule
In the absence of a counteroffer, the GCS that apply to the contracts are those of the party who is
the last one to let the counterparty know that his GCS apply. In the Butler Machnie tool case, the
High Court of Justice of England and Wales decided in Favor of the last shot rule. English law applies
the so-called ‘mirror image rule’.
This means the offer and acceptance have to be the same. If not, no contract is formed an the
acceptance is seen as counter offer. However, if both parties perform, a contract is formed ant the
terms of the las document before performance becomes binding i.e. the ‘last shot’.
3. Knock out rule
German courts have a different interpretation of Article 19 CISG. The German interpretation is that
the only GCS that apply to the contract are those over which the parties are in agreement. The
French Court de Cassation also applied the knock out rule regarding a jurisdiction clause. The Court
stated that a reply to an offer accepting the offer but which contained different terms that
materially alter the terms of the offer, did not amount to acceptance.
Chapter 7: Retention of Title.
Retention of title means that a seller, even after delivering the goods, can demand that the buyer
returns the goods in the case of non-payment by the buyer. The buyer has possession of the goods
and the seller remains the owner of the goods until he has been paid.
In most European countries, a form of retention of title is possible, but its effects are different from
one legal system to another. Although there are no formal requirements for retention of title in
most countries, the retention of title often has to be agreed upon in writing when concluding a
contract or at least prior to the dispatch of the goods. There are three main groups of
retention of title clauses.
7.1 Simple retention of title clause
A Dutch company sells 200 trees to a French company that makes wooden cupboards, and after the
delivery takes place the French company goes bankrupt. The Dutch seller can, if the French law
applies to the contract, ask for his 200 trees back. If 150 of the 200 trees have been used to make
cupboards, the Dutch company can only ask for 50 trees back. The retention of title clause only
works if the goods are identifiable in their original form.
Of course, the Dutch company can claim payment for the other 150 trees, but in the case of a
bankruptcy it is not likely that the Dutch company will ever see the money owed by the French
company. In case of a bankruptcy, the creditors only get a (small) part of their claim paid. This also
makes the importance for the seller of retention of title clause clear.
7.2 All monies or all sums retention of title
Business transactions often consist of repetitive contracts (see page 264)
7.3 Extended retention of title
There are few legal systems in which it Is possible to put an extended retention of title clause into a
contract of sale. A notable exception is Germany, where it is possible to put a retention of title
clause which also extend to the end product into the contract of sale. In case of an all monies
retention of title clause, the retention of title ends when the goods are no longer identifiable or are
sol in good faith to third parties.
In elaborate bankruptcy cases, there is often a pool of creditors who have a priority right to the
proceeds of the finished goods. Another possibility, in German law, is a retention of title which can
be used by the creditor to gain priority on the proceeds of the sale of goods.
Under German law, it is also possible to use retention of title for claims for payment not resulting
form the contract of sale. If the German company comes to pick up the threes in the Netherlands,
and while reversing the truck runs over a fork lift truck of the Dutch company, the damages resulting
from the accident can be recovered form the German company.
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Chapter 8: The international sale of goods
The United Nations Convention on the Sale of Goods (CISG), also known as the Vienna Convention, is
a UN convention with substantive law on the international sale of goods. The CISG has been ratified
by 94 countries and applies to a large part of world trade, because all the major economies ratified
the CISG. The CISG only regulates the law of obligations, the CISG does not regulate property law.
*The CISG also includes rules on the passing of risk from seller to buyer. The CISG has some lacunae
such as regarding interest rates. The interest rate itself cannot be found in the CISG. The interest
rate if a buyer fails to pay the price is found in the applicable national law.
8.1.1 Scope CISG
The CISG applies only to international sales, so the contracting parties have their places of business
in different States. The CISG is applicable to a contract if the States of the contracting parties are
Contracting States or if the rules of privates international law lead to the application of the law of a
Contract State. The CISG only applies to the sale of goods and not services, and does not apply to:
-
Sale of goods bought for personal, family or household use, unless the seller at any time
before or at the conclusion of the contract, neither knew or ought to have known the goods
were bought for personal reason.
Whether goods are bought for personal us or not can often be deduced from circumstances. For
example, A consumer does not buy 35 cars for himself or puts a car under the name of the company.
(see page 271, for more goods that don’t fall under CISG)
-
Consumer contracts fall outside the scope of the CISG because States varying mandatory
rules protecting the consumer.
The CISG does not apply to barter contracts because the payment of a price is seen as
central to a contract of sale. Barter contracts is a contract whereby one party gives goods or
services to another party and does not receive money in return, but receives other good or…
*Even if the buyer and seller have their place of business in countries which are not Contracting
States, the CISG will apply to their contract if they choose the law of a Contracting State.
Also contracts for the supply of goods to be manufactured or produced are to be considered
contracts of sales falling within the scope of the CISG. Article 3 under 1 CISG formulates an exception
in case the party ordering the goods undertakes to supply a substantial part of the materials
necessary for such manufacture or production.
 The CISG does not govern the validity of contract, so the questions of whether a contract is illegal
or whether the buyer made a mistake when accepting the offer are not governed by the CISG. The
CISG only governs the formation of the contract and the rights and obligations.
8.1.2 Opt out CISG
According to Article 6 CISG it is possible for parties to agree that the CISG, or parts of the CISG, do
not apply to the contract. Each party has to agree on the exclusion. A clause merely stating that the
contract will be governed by the laws of the state of Contracting state will result in the application of
the CISG (it’s part of the law of the Contracting state).
Parties seeking to escape from the CISG must expressly exclude its application. It is advisable to
formulate the exclusion of the CISG in the contract of sale precisely (in court it can be stated that
both parties interpreted it different). A clause in the GCS excluding the CISG is risky because if the
court decides in a specific conflict that the CIGS as whole do not apply to the contract.
8.2 Content of CISG
If there is agreement between the parties, a contract is formed. If an offer is accepted, there is
agreement and at that moment the contract is concluded, Article 23 CISG. Acceptance of an offer
becomes affective at the moment the indication of assent reaches the person making the offer,
Article 18 under 2 CISG. At this moment the agreement is reached. The importance of knowing if a
contract is concluded lies in the fact that only if there is a contract is the party that does not fulfil its
obligations liable fore damages etc.
-
An offer is valid the moment it reaches the other party. The person making the offer can
withdraw up to and including the moment the offer reaches the other party.
Up to the moment the person receiving the offer send his acceptance the person making the
offer can revoke the offer, unless the offer is irrevocable.
The person receiving the offer can decide to accept the offer, reuse the offer or make a
counteroffer. A counteroffer is a new offer. Mere silence or inactivity of the person receiving the
offer does not amount to acceptance. The offer has to be accepted ‘within reasonable time’. The
acceptance does not necessarily have to be in written. The acceptance can be oral or even derived
from the behaviour of a person (preparing the offer).
If the acceptance modifies the offer the contract is concluded as long as the modification does not
materially alter the terms of the offer. The CISG does not define when the terms of the offer are
materially altered, but does state that changes in terms like the price, payment, quality and quantity
of the goods, place and time of delivery, change in liability or settlement changes the terms of the
offers materially. Therefore only minor changes in the acceptance are considered
immaterial changes.
*According to Article 11 CISG, a contract of sale does not need be concluded in or evidenced by
writing and is not subject to any other requirement as to form, it may be proved by any means,
including witness. So an oral contract is valid under the CISG. Furthermore, oral modifications of the
contract are possible if both parties agree.
8.2.1 obligations on the seller
The main obligations on the seller can be found in Article 30 CISG. According to Article 30 the
seller has to:
-
Deliver the goods, including the documents;
Transfer property of the goods;
Deliver the goods agreed upon in the contract;
If in the contract nothing else is agreed upon, the seller has to give the goods to the carrier. If the
contract of sale does not involve a contract of carriage of the goods, the delivery takes place at the
place where the goods were at the time of conclusion of the contract, Article 31 CISG. If the location
of the goods is not known at time of the conclusion of the contract, the place of delivery is the place
of business of the seller.
*if parties agreed upon an Incoterm in the contract of sale, Article 31 CISG no longer applies. The use
of an Incoterm excludes the application of the provision in Article 31, because parties have
derogated from this article regarding the place of delivery.
The date of delivery is the date fixed by, or determinable from the contract. The seller has also the
obligation to preserve the goods if buyer fails to take delivery.
The seller has to deliver the goods agreed upon in the contract, Article 35 CSIG. According to the
contract means that the delivered goods have the quantity, quality and packaging specified in the
contract. The goods are not conform the contract, if they are not:
-
-
Fit for the purposes for which goods of the same description would ordinarily be used;
Fit for any particular purpose expressly or impliedly made known to the seller at the time of
the conclusion of the contract, except where the circumstances show that the buyer did not
rely, or that it was unreasonable for him to rely, on the seller’s skill and judgement;
Possessing the qualities of goods which the seller has held out to the buyer as a
sample or model;
Contained or packaged in the manner usual for such goods or, where there is no such
manner, in a manner adequate to preserve and protect the goods;
Article 35 under 2 CISG does not oblige the seller to deliver goods which conform to very specific
rules of the importing country. In general a seller cannot be expected to be aware of these rules.
However the Bundesgerichtshof (BGH) formulates three exceptions to this main rule. The seller
should be aware of these specific rules:
1. If the same rules apply in the seller’s country;
2. If the buyer informed the seller of these specific rules;
3. If the seller could have or should have known these specific rules because of special
circumstances (include long-standing trade relation with buyer, the seller has also a branch in
the export country, frequently sells to export country or advertises in country of buyer);
Conformity has to be present at the time of passing of risk, Article 36 CISG. If the lack of conformity
arises later, the seller is only liable if the seller guaranteed that the goods remained fit for their
ordinary purpose or for some particular purpose or will retain specified qualities or characteristics.
The existence of non-conformity has to be proven by the buyer.
The buyer must give notice of non-conformity as soon as he discovers or ought to have discovered
the non-conformity, Article 39 CISG. This article requires no particular form of communication. The
notice also has to specify the defects. The period the buyer has to give notice of non-conformity can
be quite short in some businesses (fruit, vegetables).
From the international case law on the reasonable period to give notice of non-conformity of the
goods, Article 39 CISG, it can be concluded that the term is interpreted very differently between one
legal system and another. To avoid discussions about how long a reasonable period is, it is advisable
to explicitly stipulate the reasonable period in the contract itself and not in the General
Conditions of sale (this way it is part of the main provisions of the contract).
According to Article 39 under 2 CISG, the buyer loses the right to rely on a lack of conformity of the
goods if he does not give the seller notice thereof at the latest within a period of two years from the
date on which the good were actually handed over to the buyer. In theory the buyer has two
possible ways to escape from the two-year time limit:
1. If the lack of conformity relates to fact which the seller knew or could not have been
unaware of, and which he did not disclose to the buyer;
2. The buyer may reduce the purchase price if he has a reasonable excuse for his failure to give
the required notice. It is highly theoretical whether the buyer will succeed in proving that he
has a reasonable excuse for not giving the notice to the seller;
8.2.2 Passing of risk
The risk of damage to or destruction of the goods passes at the moment agreed upon by the parties.
In general, the risk passes with the handing over of the property. The transfer of property is not
covered buy the CISG. The question when the property is transferred is governed by the national
property law applicable to the contract.
*if nothing is agreed in the contract of sale, the risk passes when the buyer takes over the goods, or,
if the buyer does not do so in due time, from the time when the goods are placed at his disposal and
he commits a breach of contract by failing to take delivery, Article 69 CISG.
Article 67 CISG states that in cases of carriage of goods, the risk passes to the buyer when the goods
are handed over to the first carrier. If the goods are sold while they are in transit, the risk passes to
the buyer when the contract is concluded, Article 68 under 1 CISG.
An incoterm is often included in the contract of sale and it is clear when the risk passes from the
seller to the buyer. With an Ex Works (EXW) clause, the risk passes when the buyer takes delivery of
the goods at the place of business of the seller. If there is a FOB clause in the contract, the risk
passes when the goods are on the ship.
8.2.3 Obligations on the buyer
The buyer’s main obligations are to take delivery and pay the purchase price, Article 53 CISG. If the
contract so provides, the buyer has to specify the form, measurement or other features of the
goods, Article 65 CISG.
Delivery: taking delivery consist of carrying out all the acts which could reasonably be expected of a
buyer to enable a seller to make a delivery. The buyer may accept or refuse early delivery, and also
accept or refuse an excess quantity.
Payment: if the price of the goods is not fixed or if there is no mode to determine the purchase price
from the contract, the normal price at the moment of the conclusion of the contract will apply. The
place of payment is the seller’s place of business or the place of handling over of the goods. If no
other arrangements have been made in the contract of sale, the buyer has to pay when he takes
control of the goods.
8.3 Committing a breach of contract
Remedies: the focus of the CISG is to save the contract. This results in introducing possibilities not
known in all legal systems. This means that the seller, even after the date of delivery, might remedy
at his own expense any failure to preform his obligations, if he can do so without unreasonable delay
and without causing the buyer unreasonable inconvenience. If the goods do not comply with the
contract the buyer may require the seller to remedy the lack of conformity by repair (see page 283).
There are also other options for the buyer:
1. To claim damages, Articles 74-77 CISG;
2. To require performance, Articles 46-48 CISG;
3. To declare avoided, Article 49 CISG;
*it is possible to combine a demand for performance or declare a contract avoided with a claim for
damages. In this case, the claim for damages compensates the loss as a result of non-performance.
8.3.1 remedy for breach of contract: claim of damages
If the buyer does not pay or the seller does not deliver the goods according to the contract, the
other party can claim compensation for damage, Article 74 CISG. The claim requires a breach of the
contract. There has of be damage as a result of the breach of contract and a causal link between the
damage and the breach.
*A party is not liable to pay damages when the damage originates from circumstances which are
beyond his control and could not have reasonably been anticipated at the time of the conclusion of
the contract, Article 79 CISG. This is called force majeure. Article, 79 under 1 CISG gives three
requirements which have to be fulfilled in order for a party to be exempted of liability. The party
invokes Article 79 CISG has to prove that the impossibility to perform is:
1. Uncontrollable: uncontrollable circumstances are for example wars and natural catastrophes, e.g.
fires, floods and earthquakes. A pandemic like COVID is also an example of a circumstance which is
uncontrollable for a party. Government measures to deal with a pandemic are also
uncontrollable for a party.
2. Unforeseeable: this often a difficult requirement to fulfil by the party invoking force majeure. It is
important to note that the kind and extent of the circumstance making it impossible to perform
must be unforeseeable. The German government said in the chase of the COVID on March 8, 2020
the crucial date was on which the pandemic became foreseeable.
3. Unavoidable: there is very little case law about this requirement. Unavoidability exists if the party
who has to perform does not have the ability to perform taking all reasonable measures. If the
performing party endures extra cost, e.g. the performing party has to hire extra workers in order to
be able to perform, this does not automatically led to unavoidability (see pages 285-288).
8.3.2 Remedy for breach of contract: requiring performance
If the goods delivered are not in accordance with the contract, the buyer can demand substitute
goods. Unlike the right to declare a contract avoided or a claim to substitute the non-conform goods,
every breach of a contractual obligation results in a claim for damages. The buyer also has the
possibility to ask for repair of the goods if the goods are not in accordance with the contract, unless
this is an unreasonable demand, Article 46 CISG.
The flipside of the buyer demanding delivery of the goods is the seller requiring performance from
the buyer, Article 62 CISG. The buyer can also fix an additional period for the seller to perform. The
seller can do likewise and fix an additional period for the buyer to fulfil his obligations.
8.3.3 Remedy for breach of contract: declare it avoided
If the buyer or seller do not perform or do not perform according to the contract, the other party
can terminate the contract. For the buyer this right is in Article 49 and for the seller in Article 64
CISG. Not every non-performance gives the other party the right to terminate the contract. The nonperformance of the seller has either to be a ‘fundamental breach’ or a breach of the contract after
the additional period granted for performance.
*So a delay of two months in delivery cannot, in general, be considered fundamental and thus
cannot be justify avoidance. However, in case of late delivery the buyer can fix a reasonable
additional period of time so that the seller can meet his obligation. The additional period of time has
to be formulated by the buyer as a deadline. A mere request is not sufficient. Again, only if the lack
of conformity constitutes a fundamental breach of the contract can the buyer claim delivery of
substitute goods, or declare the contract avoided.
The seller loses the right to avoid a contract when he becomes aware that the buyer has performed,
i.e. the buyer’s money is in the bank account of the seller. The buyer also cannot wait too long
before avoiding the contract. The buyer has to do this within reasonable time after non-performance
by the seller.
Chapter 9: Product safety and product liability
Product safety is receiving more and more public and legal attention, mainly due to food safety
scandals such as the melamine scandal in China. Melamine is a type of plastic and was mixed with
infant baby milk, resulting in the death of six babies and the hospitalization of 54,000 babies in
China.
The European Union put in place a Rapid Alert system, known as RAPEX. The main objective of the
RAPEX system is to ensure that information about dangerous non-food consumer products found in
one Member State is rapidly circulated among all the other Member States. RAPEX is part of a larger
effort by the European Union to harmonize product safety procedures and diverging consumer
product safety standards in the Member States.
RAPEX does not cover pharmaceuticals, medical devices or food, which are covered by other
mechanisms. One of these mechanisms is the CE mark. Certain categories of product must bear CE
marking if they are to be sold in the European Economic Area (EEA). The CE mark is the
manufacturer’s claim that its product meets specified essential safety requirements set out in the
relevant European legislation.
*The requirement for CE marking and the exact process to go through differs from product to
product. Different types of products are governed by different European directives and regulations.
9.1 Product recall
Since producers are liable to pay damages if they sell defective products, smart producers do
everything to take faulty products off the market. Not only because they are afraid to be held liable,
but also because they fear a public outcry resulting in damage to or even destruction of their brand
if they do not decisively handle problems with their products.
The cost of a product recall can be enormous and a lot of companies insure against this risk with a
product liability insurance. Until recently, governments could not force a company to recall their
products form the marketplace, but this is now possible due to Directive 2001/95 transposed, for
example, in Article 18 Warenwet.
9.2 Product liability
If a consumers buys a bottle of Coca Cola in a store and upon opening the bottle explodes in his face,
this constitutes a tort. Liability based on a tort exists in generally only if there is fault: the culprit did
something wrong and the wrongdoing has to be proved by the victim. Liability under tort rule is that
of negligence. The problem for the consumer is that if he wants to sue, the question is who to sue (if
he sues one, the other will say that it is their fault.
To solve this problem, the Council and the European Parliament approved Council Directive
85/374/EEC. It is a directive and not a regulation, resulting in the obligation of Member States to
transpose the directive in their own national legalisation. Council Directive 85/374/EEC results in the
producer of a product being liable for damages if the product is defective. In order to claim damages,
the injured person has to only to prove:
1. The damage;
2. The defect;
3. The causal relationship between defect and damage;
It can be difficult to prove the casual link between the defect and damage when some time has
elapsed between the use of the defective product and the occurrence of the damage, e.g. the use of
defective medicines.
In 2003, the European Commission appointed Lovells to research the practical operation of the
Product Liability Directive in the legal systems of the Member States. This study found that there are
differences in the likely outcome of product liability claims in various States. These differences
result from:
a. The optional provisions in the Product Liability Directive
There are three optional provisions in the Directive:
1. Cup on damages, Article 16 under 1 Directive 85/374/EEC: gives Member States the option in
their legislation to limit the total liability of a producer for damage caused by identical items
with the same defect to 70 million euros.
2. The development risk defence, Article 7 under e Directive 85/374/EEC: the most controversial
optional provision is the so-called development risks defence. Only Finland and Luxembourg
exclude this defence for the producer in their national laws (see 9.2.3 e).
3. Agricultural products, Article 15 under 1 Directive 85/374/EEC: removes the option not to
include agricultural products. The effect that the Directive has, now also applies to agricultural
products in all Member state.
b. Discrepancies in implementation of the Product Liability Directive
The terms of the Directive are sometimes altered when transposed into national legislation
(See page 309).
c. Differing interpretations of the Directive by national courts
There are few examples of different interpretation of the Directive but it does happen. For example
courts in the Netherlands and the United Kingdom have applied the development risks defence
differently in similar circumstances involving contamination of blood products.
d. The assessment of damages also varies from one legal system to another
The assessment of damages also varies from one legal system to another. Certain countries, such as
Greece and the Netherlands, implemented the product Liability Directive in their national legislation
in such a way that non-material damage is not recoverable in product liability cases.
e. Differences in national liability systems that exist alongside the Product Liability Directive
National systems of liability exist alongside the laws implementing the Directive. This results in
different levels of product liability risks for producers among Member States. If a product is
defective and injures a consumer, the consumer will generally have the option of claiming either
under national tort law, based on the fault or neglect of the product supplier, or alternatively under
the laws implementing the Directive on the basis that the product was defective.
f.
Different procedural rules and levels of access to justice
In some legal systems, it is possible to bring a claim on behalf of a group of people before a court.
This is called a class action. Class actions are available in the United States, but not for claimants in
Europe with the notable exceptions of Spain and Sweden.
g. Consumer attitudes vary form on Member State to another
Variations in consumer attitude are affected by different social security regimes in the Member
States, the levels of support and encouragement provided by consumer groups, the influence of the
media and social attitudes, in other words being more aware of your rights and more critical
towards products.
9.2.1 Producer
Article 3 Council Directive 85/374/EEC designates the following persons as the ‘producer’:
1. Producer of the end product;
2. The producer of any raw material or the manufacturer of a component part;
If the producer of electric blankets buys the wiring from a specialized manufacturer, the wire
manufacturer is also seen as a manufacturer of the blanket. So if the wires are defective, a victim
receiving an electric shock can choose to sue either the producer of the blankets, the producer of
the wiring or both at the same time.
3. The person who present himself as a product;
4. Importer into the European Union;
The producer is also the person who imports the goods in the European Union, Article 3 under 2
Council Directive 85/374/EEC. In 2012, almost 60% of all defective products in the European Union
came from China. Product safety is not so high on the agenda for Chinese producers, this is
something to consider when importing from China, since the importer is legally the producer.
5. The supplier of the product
As a last resort, the claimant can sue the supplier of the product. If the producer of the product
cannot be identified, each supplier of the product shall be treated as its producer unless he informs
the injured person, within a reasonable time, of the identity of the producer or of the person who
supplied him with the product.
9.2.2 Product
‘Product’, according to Article 2 Directive 85/374/EEC, means all movables including electricity, with
the exception of primary agricultural product, even though it may be incorporated into another
movable or into an immovable. ‘Primarily agricultural products’ means product of the soil, of stockfarming and of fisheries, excluding products which have undergone initial processing.
*the exception of ‘primary agricultural products’ was later revoked in Directive 1999/34/EG,
resulting in products of agricultural origin being considered products in the sense of the
Product Liability Directive.
9.2.3 Producer’s exemption or reduction of liability
The producer is not liable, Article 7 Directive 85/374/EEC, if he proves on of the following:
a. He did not put the product into circulation
An electronics manufacturer develops tablets, not to be sold to the public but further testing. The
tablets are stolen from the manufacturer’s warehouse. They are sold by the thieves and when a
buyer tries to use them, they explode because of a fault in the battery. The manufacturer is not
liable for the damage.
b. The defect appeared after the product was put into circulation
A producer is also not liable if it is likely that the defect that caused the damage did not exist at the
time the product was put into circulation by him, or that this defect came about afterwards through
changes made by the consumer after buying the product.
c. The product was not manufactured to be sold or distributed for profit
There is also no product liability if a product was not manufactured by a person for sale or any form
of distribution for economic purpose, or was not manufactured or distributed by this person in the
course of his business.
d. The defect is due to compliance of the product with mandatory regulations issued by the
public authorities
In Dutch law there are very few examples to be found of a producer successfully relying on this
defence. The producer can only use this defence if he has no choice in determining the composition
and structure of the product. It is not enough that the components the producer uses are
allowed by the government.
e. The state of scientific and technical knowledge at the time the product was put into circulation
was insufficient to identify the defect
The producer is also not liable if he can prove that the state of scientific and technical knowledge at
the time he put the product into circulation was such that he could not have known of the existence
of the defect. This development risk defence is also known as the ‘state of the art defence’. The
justification for the ‘state of the art defence’ is the desire to encourage research into new products.
A producer who is confronted with absolute liability for unforeseeable defects will obviously not risk
marketing a product (this is especially important for high-tech industries).
The state of knowledge includes all data from the scientific community as a whole. This obligation
goes further than the subjective knowledge of a producer taking reasonable care. However, the
producer must have had a reasonable opportunity to get the information.
f.
The defect of a component was caused during the manufacture of the final product
In the case of, the manufacturer can defend himself by proving that the defect is attributable to the
design of the product in which the component has been fitted or to the instructions given by the
manufacturer of the product. The producer of parts or components can be liable if the product is
defective because of defective parts. The producer of a part is not liable if:
1. The design of the end product has a flaw resulting in a defective product: A car manufacturer
buys types which can be used for cars weighing no more than 1,000kg. if the car manufacturer
decides to put the types on a car weighing 1,500kg an accidents happen due to exploding
types, the tyre producer can use this defence.
2. The producer produces the part according to specific instructions of the producer of the
end product
9.2.4 Defective
There are three main categories of defects on which product liability claims are based”:
1.
2.
3.
4.
Design errors;
Instruction errors;
Production errors;
Defective warnings;
The first two categories result in all the products being defective. The third category results in a few
or a batch of products being defective. The first three categories result in the liability of the
producer. The fourth category is difficult to prove because the claimant has to prove that the
instructions and warnings on a product do not accurately reflect the level of safety which
could be expected.
A dangerous product is not necessarily defective. Guns or fireworks are inherently unsafe products.
If a person uses a gun to shoot someone, the gun is not defective. If the gun explodes in the face of
the shooter, the gun is defective. A product is defective, Article 6 Directive 85/374/EEC, when it does
not provide the safety which a person is entitled to expect, taking all circumstances into
account, including:
a. The presentation of the product: this covers the making of the product, instructions, warnings
and labels such as an expiry date, whether the product is aimed for children or adults and the
packaging of the product.
b. The use to which it could reasonably be expected that the product would be put: a producer
should also take into account the fact that consumers may use their products in ways not
intended, and should warn against this use and/or take technical measures preventing such use.
c. The time the product was put into circulation: many products have become safer in recent
years. Many cars now have airbags, antilock brake systems and electronic stability control, things
which did not exist in the 1970s. The fact that a car from the 1970s does not have airbags does
not make it a defective product. A lot of the safety features mentioned are now optional. But
safety features have a tendency to become standard.
*A person who is injured by a consumer product may argue in court he was injured because he
relied on certain promises, or warranties, the manufacturer or seller made but that turned out
not to be true.
9.2.5 Damages
In order to be reimbursed for the damages the consumer suffered, he is required to prove the
damage, the defect and the causal relationship between defect and damage, Article 4 Directive
85/374/EEC. A consumer can claim damages under the Product Liability Directive for:
a. Damage caused by death or personal injuries
According to Article 9 Council Directive 85/374/EEC, whether non-material damage can be claimed
depends on national legislation. Non-material damage can be, for example, panic attacks after
seeing your brand new Toyota explode. If the consumer is not physically hurt, there is no material
damage. If the explosion causes severe burns, material damage such as hospital costs and lost
income can of course be claimed
*the Netherlands transposed Council Directive 85/374/EEC in such a way that non-material damage
consisting solely of mental injury, not caused by physical injury or death, cannot be claimed.
b. Damage to, or destruction of, any item of property other than the defective product itself,
with a lower threshold of €500,- provided that the item of property:
(i) Is a type ordinarily intended for private use or consumption, and;
(ii) was used by the injured person mainly for his own private use or consumption;
Damage to products used professionally, pure economic loss, damage to the product itself and
damage under €500,- cannot be claimed from the producer based on the Product Liability Directive.
Damage under €500,- to property intended for private use as well as damage to the product itself
have to be claimed from the seller of the product based on breach of contract. The threshold of
€500,- does not apply to injuries.
According to Article 7:17 Dutch Civil Code, the buyer may expect the product to posses the qualities
necessary for its normal use and any special use provided in the sales agreement. If the buyer of a
product receives a product which does not have the quality he is entitled to, he can claim the
aforementioned damages from the seller.
Damages not covered by the Product Liability Directive has to be recovered from either the producer
based on a tort, e.g. Article 6:162 Dutch Civil Code, or the seller based on breach of contract.
9.2.6 Consumer
If a consumer has the choice of suing the professional seller based on a breach of contract or the
producer based on product liability, the consumer must sue the producer, Article 7:24 Dutch Civil
Code. The consumer can sue the seller if the producer cannot be identified, and if the damage
consists of a material damage under 500,-, which cannot be claimed from the producer based on
product liability, this can be claimed from the professional seller.
*the seller can also be sued for damages if he knew or should have known that the product he was
selling was defective, or if he guaranteed that the object sold would be free of that defect.
9.2.7 Tort liability
Tort liability has not lost its meaning completely. A claim based on tort is still used when the
limitation period for product liability has expired. Article 10 Directive 85/374/EEC limits the period in
which product liability can be claimed to:
-
-
Three years: the limitation period of three years runs from the day on which the plaintiff
became aware, or should reasonably have become aware, of the damage, the defect and the
identity of the producer.
Ten years: the ability to claim based on product liability also expires after a period of ten
years from the date on which the producer put the actual product which caused the damage
into circulation.
Tort liability also becomes important in case the producer of the product is bankrupt. The victim can
than try to find another party who is liable and claim damages based on a tort. This is not a simple
task because the victim has to proof that the party he or she sues has been negligent. Another
reason for basing a claim on tort and not product liability is that with product liability only damage
mentioned in Article 9 Directive 85/374/EEC can be claimed.
-----------------------------------------
Chapter 10: Incoterms
The International Chamber of Commerce (ICC) started in 1934 to create Incoterms. Incoterms stand
for International Commercial Terms. Incoterms are revised every ten years or so to reflect changes in
trade. As Incoterms are made by the non-governmental ICC, they are not part of a treaty but rules
made by a private institution, and so do not automatically apply to a contract. Unlike treaties (CISG),
incoterms have to be explicitly agreed upon.
*The “Incoterms 2020” is a revision of the “Incoterms 2010” version. The main changes in the
“Incoterms 2020” are (see page 329).
Rules for any mode (or modes) of transport
(ship, road, rail and aeroplane)
EXW – Ex works
FCA – Free carrier
CPT – Carriage paid to
CIP – Carriage and insurance paid
DAP – Delivered at place
DPU – Delivered at place unloaded
DDP – Delivered duty paid
Rules for sea and inland waterway
transport only
FAS – Free alongside ship
FOB – Free on board
CFR – Cost and freight
CIF – Cost, insurance and Freight
Behind the maritime conditions (FAS/FOB/CFR/CIF) there is always a port of departure or arrival
mentioned. Behind the other incoterms there is always a place mentioned. The ICC strongly
recommends the use of incoterms which are not exclusive to maritime transport in case of
multimodal transport. Multimodal transport is a transportation of goods by at least two modes of
transport. For multimodal transport it is advisable to use FCA instead of FOB, CPT instead of CFRT
and CIP instead of CIF.
Incoterms are widely used in international contracts of sale and deal with:
-
-
-
Transportation costs: the incoterm used in the contract of sale determines whether the buyer,
the seller or both pay part of the transportation costs. Transportation costs are always an issue
when buying goods, and particularly in international trade;
Passing of risk: the risk can pass at different points during transportation. Depending on the
agreed Incoterm, the risk can pass when the goods are picked up at the sellers factory, when
they have been loaded on the ship or wen they are delivered at the buyers factory.
Delivery of the goods: Incoterms also deal with the place of delivery. Delivery in the sense that
the goods are available to the buyer, not in the sense that the ownership of the goods is
transferred. The passing of the risk in the incoterms is linked to the delivery of the goods, unlike
most legal systems where the risk passes with the transfer of ownership.
Incoterms regulate the division of the transportation costs, the passing of the risk of damaging the
goods and where the goods have to be delivered. However, Incoterms do not regulate the mode of
payment, the conclusion of the contract, the transfer of ownership or the consequences of a
breach of contract.
*Incoterms establish rights and obligations between a buyer and a seller, but not regarding third
parties. In a contract of sale with an Ex Works clause, the buyer will have to enter into a contract of
carriage himself (see chapter 11).
10.2 EXW: EX Works
Costs: the buyer has to pick up the goods at the place of the seller’s business and pay for the
transport to his place of business.
Passing risk and delivery: risk passes when the buyer takes delivery of the goods at the place of the
sellers business. Ex Works has some advantages for the seller: since the transportation costs are not
included in the offer, the sale price can seem lower compared to competitors selling under another
Incoterm. Another advantage is that the risk is borne by the buyer.
Ex Works also has some disadvantages. A disadvantage of selling Ex Works is that, unlike with the
other incoterms, the seller does not know where the goods are going. With FCA the seller has to
take care of the export formalities. In case of Ex Works it is the buyer who has to take care of the
export formalities (paperwork). With an Ex Works sale, the seller runs the risk of a competition with
his own goods sold in another country or that the goods ends up in a country where the seller has an
exclusive distribution agreement.
Another disadvantage is that with EX Works proving that the goods are exported is difficult. In
general, no VAT has to be paid on goods which are exported, but the tax office will want to see proof
that the goods have been exported. Transport documents like a bill of loading can prove that the
goods have been exported. The problem with EX Works is that only the buyer has the right to
receive these documents because these documents are given by the carrier of the party with whom
the carrier entered into the contract of carriage.
With an Ex Works close attention should also paid to the fact that the seller of the goods should not
sign for the transport document, e.g. the CMR waybill or Bill of Loading. If the seller signs it, he
becomes the contracting party of the carrier and if the buyer does not pay the transports cost, the
carrier will then successfully turn to the seller to get his money. Ex works is the only Incoterms
whereby the buyer has to take care of the export formalities.
10.3 F-Terms
Costs: FAS (Free Alongside Ship); the seller has to pay the transport costs to get the goods to the
quay alongside the ship.
FOB (free on Board); the seller has to pay for the transport to get the goods to the port of departure
and the loading on board the ship. The seller also has to take care of any export licence.
FCA (free Carrier); and FOB are the same as regards costs. The difference is that FOB is used for
water transportation and FCA is used for any means of transport (sea, rail, road and air). The seller
has to pay for the goods to get to the train, truck or aeroplane and load the goods onto the mode
of transport.
Passing risk and delivery: with FCA and FOB the risk passes from the seller to the buyer when the
goods are on board of the ship, truck, train or aeroplane. With FAS the risk of damage to or
destruction of the goods passes from the seller to the buyer when the goods are on the quay,
alongside the ship at the port of departure.
With FCA and FOB, the seller is responsible for loading the goods onto the means of transport of the
buyer. With FCA, the delivery of goods is completed when the goods have been loaded onto the
means of transport provided by the buyer at the seller’s premises. Under the FAS clause, the
delivery is complete when the goods are on the quay alongside the ship.
10.4 C-terms
Cost: CPT (Carriage paid to) and CFR (Cost and Freight): the seller has to pay for the transport of the
goods to the port of arrival (CFR) or the place mentioned after the CPT Incoterm. Especially with CPT
and CFR the risk exists that the transported goods are not insured. Neither the seller nor the buyer
has the obligation to insure the goods. Since the risk of damage to the goods lies with the buyer
during transport, it is in the interest of the buyer to insure the goods.
CIP (Carriage and insurance Paid) and CIF (Cost, Insurance and Freight): the seller has to transport
the goods to the port or place of arrival, but also has to pay to insure the goods during the trip. The
cost of unloading the goods at the place or port of arrival are for the buyer for all C-terms. The goods
have to be insured for 110% of the value of the invoice. The additional 10% is meant to cover the
loss of the profit which buyers of goods expect to make from the sale.
Under CIP the seller has to insure the goods under Clause A of the Institute Cargo Clauses. Insurance
under Clause A can be compared to an ‘all risk’ insurance. Under CIF the seller has only the
obligation to insure under Clause C. Unlike the Clause A the risk of theft is not covered by Clauses B
or C. if the buyer wants an extended cover, he should agree with the seller.
Passing risk and delivery: with all C-terms, the risk passes, as with FCA and FOB, when the good are
delivered and are on board the ship, train, truck or aeroplane at the place of departure. This is not
the place mentioned after the C-term. Maritime Incoterms FOB, CFR and CIF explicitly state that the
goods have to be placed on board the vessel by the seller, before the risk passes to the buyer.
Maritime incoterms (FAS/FOB/CFR/CIF) are inappropriate when goods are transported in containers.
If goods are transported in containers there are two moments when damage to the goods can
happen (during loading or unloading of the goods). The question arises: when where the
goods damaged?
*For the transport by container it is therefore advisable to use the Incoterm CIP or CPT. If the goods
are transported under these term the risk passes from the seller to the buyer when the goods are
handed over to the first carrier, unless the contract of sale specifies another place or point of
delivery. If the seller takes photos of the loaded goods in the container just before the container
leaves, the seller can prove that the goods were not damaged when the risk passes.
10.5 D-terms
Costs: if there is the Incoterm DAP (delivered at Place) in the contract of sale, the seller has to pay
all costs to get the goods to the place mentioned after the DAP Incoterm. The seller does not have to
take care of import clearance, the buyer does. The seller is also not responsible for unloading the
goods and has no obligation to pay for this. These costs are to be borne by the buyer. If the buyer
and seller include the DPU (delivered Place Unloaded) in their contract of sale, the seller has to pay
for transport to the terminal of arrival and pay for the unloading of the goods.
A reason for a seller, especially when shipping fragile goods like plasma TVs, to contract under DAP
instead of CIP is that the seller wants to have better control of the transportation risk. If a seller sells
CIP and the goods are damaged during transport, the seller will have to tell his buyer that a. he has
to pay the full sales price for the damaged goods and b. the seller will have to address the insurance
company to claim the damages to the goods.
*The seller has also a commercial relationship with the buyer. Customers do not like to pay for
goods that they are not going to receive or are damaged. As a result, the seller runs the risk of
losing the customer.
DPU can be used for all means of transport. Under the DAP condition, same as under DPU, the seller
does not have to take care of import clearance. Under both conditions (DAP and DPU), the seller
does have the obligation to take care of the export clearance. With DDP (delivered Duty Paid) the
seller has to pay for transport to the place of business of the buyer. With notable exception of DDP,
import tax has to be paid by the buyer of the goods under all Incoterm.
Passing risk and delivery: under the Incoterm DPU, the risk passes when the goods are delivered.
The goods are considered delivered when they are unloaded. This is the only Incoterm where the
seller has the obligation to unload the goods. Under the Incoterm DAP, the unloading is the
responsibility of the buyer. The goods are considered delivered when they reach the named
destination and are ready for unloading. At this moment the risk has passed to the buyer.
Goods are often sold as a Full Container Load (FCL) or as a Less then Container Load (LCL). If goods
are sold as a FCL, the easiest way to deliver the goods is by handing over the container, with the
Incoterm DAP. In case of LCL sale, the container will often be filled with the same or other products
sold to different buyers (cost are the same for half full or full, filled up by agent). In this case DPU is
often agreed upon, because the seller of a product will unload the goods from the container, so the
individual buyers can pick their orders up on a specific location.
A seller who chooses DDP should also bear in mind that he has the obligation to pay all taxes relating
to the import of the goods and the Value Added Tax (VAT). Under a DDP sale the seller bears the risk
of tax increases between the conclusion of the contract of sale and the arrival of the goods
at their destination.
For all Incoterms expect EXW and DDP, the seller is responsible for export clearance and the buyer is
responsible for import clearance. With EXW, it is the buyer and not the seller who must take care of
export clearance. With DDP, it is the seller and not the buyer who has to take care of
import clearance.
10.6 Free on Board (FOB) and Cost, insurance and Freight (CIF)
FOB and CIF are the most used Incoterms in international trade. At the beginning of the 19th century,
FOB was the most used shipping term. In this era, the buyer/merchant was more involved in the
shipping of the goods, because it was the shipping lines were irregular and communication was
difficult. This changed when technological developments in telecommunication and the emergence
of shipping services.
The seller on the other hand was happy to oblige because it w easier for the seller to arrange
transport of the goods from his own country to overseas countries than it was for the buyer to
arrange transport from a country on the other side of the globe to his own country. The seller could
also charge a higher price for his products. As a result, the use of the CIF clause in international
contracts became more popular.
Nowadays, the use of CIF and FOG clauses is linked to the economic climate of the importing
country. If the importer/buyer is form a country with a strong currency, e.g. euro, US dollar or yen,
the importer should n9ot have a problem with contracting under the CIF incoterm. For an
importer/buyer, CIF is a more convenient way of shipping since the importer doesn’t have to deal
with freight or other shipping detail. Importers/buyers from countries with weak currencies prefer to
opt for the FOB Incoterm. This avoids the buyer paying for the shipping of the goods in a hard
currency. The adage in international trad is: ‘Buy FOB and sell CIF’.
The advantages for a seller to sell under CIF are that he probably has more experience in shipping his
own goods and can make sure that the production and shipment of the goods are connected. This
results in lower storage costs for the seller.
For the buyer buying FOB has two benefits over CIF. The importer/buyer has better control of the
freight and the freight cost and can get more competitive rates for shipment. Chris Chalmers
explains why Chinese exporters prefer to sell under CIF. He explains that imports/buyers often end
up paying for freight twice (once to their supplier, and than again in abnormal port & terminal
charges (CHaINA Magazine, 2011).
Chapter 11: Contract of Carriage
The following chart shows (page 351) shows that truck is the most common mode of transportation
(50%). Since the percentages are based on tonne-kilometres, they are a little distorted. Most heavy
goods are transported by road and not by aeroplane. From the tables 11.1 and 11.2 (page 352) it
becomes clear that sea transport is far the most widely used mode for transporting goods from the
European Union to the rest of the world and the other way around. ‘
In value 47,5% of the goods sold to countries outside the European Union were transported by sea,
as were 53,1% of the goods sent to the European Union. By wight, 80,4% of goods shipped by
European companies to trading partners around the world and 73,8% of the goods sent to the
European Union were transported by ship. It is also clear that light, expensive products are often
transport by air. Since transportation by air, sea and road are by far the most important, this chapter
will only deal with these three modes of transportation.
In international trade, Incoterms are very often used to deal with the question of which party pays
for and which party organizes the transport of the goods. If there is an Ex Works clause in the
contract of sale, the buyer picks up the goods at the seller’s factory. The buyer is the only party to
the contract who enters into a contract of carriage. If there is a DDP clause in the contract of sale,
the seller is the only party who enters into a contract of carriage, because under a DDP clause it is up
to the seller to deliver the goods to the buyer.
Demurrage and detention: if goods are shipped in containers, the containers are often owned by
the shipping company. The shipper can use the container for a number of days for free. This is called
‘free time’. This free time is limited, and after the free time has expired, the shipper has to pay for
use of the container.
If the container belongs to the shipping company, the shipping company can ask demurrage costs.
This happens if the goods cannot be loaded onto the ship or the goods ar not collected from the port
of arrival by the receiver of the goods. Detention costs are costs the shipping company charges after
passage of the free time for use of the container when the container is used by the receiver or send
of the goods. The importer or exporter of the goods has a number of days to return the container to
the shipping company.
There is no standard tariff for demurrage and detention costs, so these can be negotiated. In
general, demurrage costs are higher than detention costs, because it is expensive for a carrier to
stock a container at a port in a container terminal.
11.1 General principles of contract of carriage
There are four main principles regarding the contract of carriage. The way these principles are
applied can differ from one mode of transport to another. The four principles are:
1.
2.
3.
4.
Limitation of liability of the carrier;
Time limits within which claims for payment of damages have to be filed;
The carrier has a duty to achieve a given result;
The carrier has two main obligations – to deliver the goods and deliver the goods undamaged;
These principles are applied in the relevant treaties covering the mode of transport in question. The
application of these principles is slightly different for each mode of transport. Road transport is dealt
with in the Convention Relative au Contract de Transport International de Merchandises per Route
(CMR), sea transport in the Hague-Visby Rules and the more recent Rotterdam Rules and air
transport in the Warsaw Convention and the more recent Montreal Convention (MC). These treaties
do not apply to national contracts of carriage.
11.1.1 Limitation of liability of the carrier
If a shipment of Pentium computer chips is damaged during transport, the damage is enormous.
Pentium chips cost between 200 and 400 a piece. If the container (small from size, lot of chips)
stolen or damaged, the loss will be in the tens of millions of euros. Since the carrier is only paid a
small amount of money relative to the amount of damage possible to the goods, the liability of the
carrier is limited.
11.1.2 Time limits within which claims for payment of damages have to be filed
These time limits fall into two categories. There is a limit for complaints and a time limit
for legal actions:
11.1.2.1 Time limit for complaints:
Road transport:
- Damage or loss – if the goods are visibly damaged when delivered, the receiver of the goods has
to inform the carrier immediately. In case the loss or damage of the goods is not apparent, the
receiver of the goods has to inform the carrier within seven day (Article 30 under 1 CMR).
- Delay – Compensation claims for delay in delivery og foods have to made within 21 days, in
writing, to the carrier (Article 30 under 3 CMR).
-
Sea transport:
Damage or loss – Under the Hague-Visby Rules (HVR), a claim for compensation for damage or loss the
notice has to be giving in writing to the carrier at the port of discharge before or at the time of the
removal of the goods. If the loss or damage be not apparent notice has to be given within three days
after delivery.
Under the Hamburg rules the notice for damage or loss has to be given not later than the
working day after the day when the goods were handed over or if the damage was not apparent
notice has to be given within fifteen days after the goods were handed over. Under the
Rotterdam Rules notice of loss of or damage to the goods has to be given before or at time of
the delivery, or, if the loss or damage is not apparent, within seven working days after delivery.
-
-
-
Delay – Under the Hague-Visby Rules it is not possible to claim damages for the delay of delivery of the
goods. Under the Hamburg rules no compensation is payable for loss resulting from delay in delivery
unless a notice has been given in writing to carrier within 60 day after the day when the goods were
handed over to the recipient of the goods. Under Rotterdam Rules states that if the claimant seeks
compensation for delay, notice has to be given within 21 consecutive days after delivery of the gods.
Air transport:
Damage or loss – according to Article 31 MC, claims have to be made to the carrier:
a) Regarding damaged cargo: within 14 days of receipt of the cargo
b) Regarding damaged baggage: within 7 days of the receipt of the baggage
Delay – According to Article 31 MC, claims regarding delayed cargo or baggage have to be made to the
carrier within 21 days from the date on which the baggage or cargo have been placed at disposal of the
recipient.
11.2.2.2 time limit for legal actions:
Road transport: for road freight, if the CMR is applicable, a claim has to be filed within one year,
Article 32 CMR. In case of wilful misconduct, the claimant has three years to start judicial
proceedings. This period can be prolonged if the national law applicable governing the case makes
this possible, Article 32 under 2 CMR (Dutch national law see page 358).
In case or partial loss, damage or delay in delivery, the period of limitation of action begins on the
date of delivery. In the case of total loss, the period of limitation begins on the thirtieth day after the
expiry of the agreed time limit or, where there is no agreed time limit, from the sixtieth day after the
date on which the goods were taken over by the carrier.
*In addition, in case of complete loss, Article 32 under 1 b CMR provides for the possibility that the
limitation period, unlike paragraph a, starts 30 days after expiry of the agreed time limit. The actual
delivery date for the goods is unambiguous and known by both sender and receiver, so they know
the start of the limitation period and are not suddenly faced with the limitation of their claim.
Sea transport: under the Hague-Visby Rules the carrier is discharged from all liability whatsoever in
respect of the goods, unless suit is brought within one year of their delivery or of the date when they
should have been delivered Article III under 6 HVR. The time limit for an action relating to carriage of
goods under the Hamburg Rules is time-barred if the proceedings have not been instituted within a
period of two years, the same goes for the Rotterdam Rules.
*The ability to prolong the period for instituting a lawsuit under the HVR, the Hamburg Rules or the
Rotterdam Rules is very limited (unlike a claim under CMR). Extension of the two-year period is only
possible if the person against which the suit is made extends the period by declaration.
Air transport: according to Article 35 of the Montreal Convention, the right to claim damages ends if
an action is not brought within a period of two years, reckoned from the date of arrival at the
destination, or on which the aircraft ought to have arrived, or on which carriage stopped. This twoyear period cannot be prolonged.
11.1.3 Main obligations on the carrier
The obligation on the carrier is to achieve a given result. The entails delivering the goods (i)
undamaged (ii) on time. These are not an obligation of best intent, which makes misfeasance easier
to prove for the contractual counterparty of the carrier. If the goods are not delivered on time, the
carrier has not fulfilled his contractual duties and is liable for damages.
In cases where there is the obligation of best intent, it is much more difficult (but not always
impossible) to prove that the contractual obligation ‘to do one’s best’ has not been fulfilled.
The difference between contractual and non-contractual damages is important. The treaties that
deal with contract of carriage, i.e. CMR, MC and Rotterdam Rules, do not apply to third party
damages. At first sight the difference between contractual and non-contractual damages is obvious.
However, there are cases (see page 363) where courts struggle with this question.
11.2 Sea carriage
The top 5 largest ship-owning countries (see page 364) account for approximately 50% of the total
world fleet, while the top 10 of largest ship-owning countries account for approximately 68% of the
total world fleet. The Hague-Visby Rules are currently the most important maritime convention
because with the notable exception of the United States all countries in the top 10 of largest shipowning countries either ratified the Hague Visby Rules or adopted in large part the HVR in their
national legislation (Germany, Korea and China).
The Hague-Visby Rules were criticized especially by a group of developing countries who found the
rules too much in favour of the carrier and not favourable enough for the shipper of the goods.
Carriers come from rich countries like the United States and European Union. The one-year time
limitation in the HVR to bring an action before the court is very short and also the limitation of the
liability of the carrier under the HVR is advantageous for the carrier but not so much
for the shipper of the goods.
As a result a new convention was drawn up in 1978: the Hamburg Rules. Under the Hamburg Rules
the time limit for claims is two years and the carrier is liable for 835 SDR per package or unit and 2.5
SDR per kilogram (instead of 666,67 per package, 2 per kilogram). A lot of countries with big shipping
companies found these limits too high and did not sign the Hamburg Rules. As a result the Hamburg
Rules has little importance in maritime law.
The emergence of electronic communication and the change in shipping methods, i.e. use of
containers make the HVR less suitable. The HVR only apply if a bill of lading is issued, while
nowadays there are a lot of other contracts of carriage like waybills and electronic transport records.
As a result the Rotterdam Rules were created in 2008. The Rotterdam rules give a much more
detailed regulation of the carriage by sea than the Hague Visby Rules. The HVR contains 10 articles
whereas the Rotterdam Rules contains 96 articles. Unlike the HVR and Hamburg Rules, the
Rotterdam Rules not only apply to the carriage of goods by sea but also the carriage of goods by land
or air in combination with sea carriage. Under these rules the carrier is liable for 875 SDR per
package or unit and 3 SDR per kilogram. Thereby it remains to be seen if the Rotterdam Rules will
become an important convention.
11.2.1 Scope of Hague Visby Rules
The Hague Visby Rules (HVR) apply only to contract of carriage covered by a bill of lading or any
similar document of title or if the carriage is from a port in a contracting state Article I HVR. A bill of
lading is a document evidencing the receipt of goods for shipment and issued by a ship owner
engaged in the business of transporting goods over sea. A bill of lading contains the following info:
a)
b)
c)
d)
A description of the goods;
The leading marks necessary for identification of the goods;
The number of packages or pieces, or the quantity of goods;
The weight of the goods, if furnished by the shipper;
The ship owner does not guarantee that the goods are in good condition since he does not open the
cargo. The ship owner only acknowledge that the goods are in apparent good condition. If a ship
owner receives a shipment of refrigerators whose packaging is damaged or a shipment of grain
which became wet during the transport to the ship. The ship owner will issue a clause or dirty bill of
lading. The ship owner will describe in which way the goods appear to have been damaged.
If the ship owner gives a clean bill of lading for a shipment of grain and the port of arrival the grain is
damaged by water, the bill of lading is conclusive evidence that the damage appeared during the sea
voyage. As a result, the ship owner is liable to pay damages. A bill of lading is not only a receipt but:
-
Also evidence of the existence and terms of the contract of carriage;
And a document of title;
Since a bill of lading is a title, it is possible to transfer the ownership of the goods, by transferring the
bill of lading. It is incorrect to state that by transferring the bill of lading, ownership of the goods is
transferred automatically. Handing over the bill of lading does not automatically mean transferring
ownership of the goods, only the control of goods. Transfer of ownership by transferring the bill of
lading will for example not take place, if there is a retention of title clause in the contract of sale.
For the carriage by truck a consignment note is used and for air transport an airway bill is used. The
consignment note and the airway bill are in the first place proof of the existence of a contract of
carriage and a receipt. Unlike the bill of lading, the control of goods is not handed over with the
consignment not or airway bill.
In recent years, the use of bills of lading has declined and been replaced with the sea waybill. The
main difference between these two documents is that a sea waybill does not confer title of the
goods to the bearer, and as a result there is no need for the physical documents to be presented for
the goods to be released.
A bill of lading is always issued after the loading of the goods, as a result the HVR apply only if the
port of loading is located in a contracting State. This is no the case with the Hamburg Rules and the
Rotterdam Rules. The Hamburg Rules apply also if a bill of lading is issued in Contracting State, but
also in case of a contract of carriage by sea between two different States, if the port of loading or
discharge as provided for in the contract of carriage by sea is located in a Contracting State.
The Rotterdam Rules apply in case of sea carriage between different States if any one of the
following places is located in a Contracting State Article 5 Rotterdam rules:
a)
b)
c)
d)
The place of receipt;
The port of loading;
The place of delivery;
The port of discharge;
The HVR apply to the carriage of the sea carriage of all cargo and this includes goods, wares,
merchandise, and articles of every kind whatsoever except live animals and deck cargo. The
Hamburg Rules and Rotterdam Rules apply to the carriage of all cargo including deck cargo and live
animals. As a result, it is possible in case of a contract of carriage under the HVR for pay for any
damages to the goods in case of the transport of deck cargo or the transport of live animals. The
carrier has in these cases the possibility to exclude the liability of 666,67 SDR per package or unit and
2 SDR per kilogram. Deck cargo only falls outside the scope of the HRV if:
1. The bill of lading clearly states on the face of the bill of lading that the cargo is being
carried on deck;
2. And the cargo is carried on deck;
11.2.2 Liability for sea carriage
11.2.2.1 Period carrier is responsible for the goods: the periods of the carrier’s responsibility for
loss of or damage to the goods varies slightly from one convention to another. Under the HVR the
carrier is responsible for the goods from the time the goods are loaded on to the ship until the time
the goods are discharged from the ship.
According to the Hamburg Rules the period of responsibility of the sea carrier is the period during
which the carrier is in charge of the goods at the port of loading, during the carriage and at the port
of discharge. The period of responsibility of the carrier or the goods under the Rotterdam Rules
begins when the carrier or a performing party receives the good for carriage and ends when the
goods are delivered (both responsibility times longer than HVR).
11.2.2.2 Main obligation carrier: the HVR state in Article II HVR that in case of a contract of carriage
of goods by sea the carrier is responsible for the loading, handling, stowage, carriage, custody, care
and discharge of the goods. The Hamburg Rules do not mention explicitly this obligation for the
carrier, but this is implied in Article 5 under 1 Hamburg Rules. This article states that the carrier is
liable for loss resulting from loss of or damage to the goods, as well as from delay in delivery.
Under the Rotterdam Rules a carrier has, as its primary obligation, to carry goods to the destination
and deliver them to consignee, Article 11 Rotterdam Rules. The carrier is responsible for the goods
from the moment he receives them until the moment they are delivered.
11.2.2.3 Liability under HVR: Under Article III of the HVR the carrier is bound before and at the
beginning of the voyage to exercise due diligence to:
-
Make the ship seaworthy;
Properly man, equip and supply the ship;
Make the holds, refrigerating and cool chambers, and all other parts of the ship in which goods
are carried, fit and safe for their reception, carriage and preservation (“cargo worthiness”);
Properly and carefully load, handle, stow, carry, keep, care for, and discharge the goods carried;
If the carrier has fulfilled these obligations the carrier is not liable to for loss or damages Article IV
under 1 HVR. As a result the carrier is, for example, not liable for damage arising from
unseaworthiness unless caused by lack of due diligence on the part of the carrier to make the ship
seaworthy Article IV under 1 HVR. In case the claimant alleges that the loss of or damage to the
goods was caused by unseaworthiness, it is up to the claimant to prove his allegation. It is up to the
carrier to prove he exercised due diligence.
*Under Article 17 under 5 of the Rotterdam Rules the burden of proof of the claimant is lighter: he
only has to prove that the loss, damage or delay was probably caused by unseaworthiness. This is
unlike the HVR where the claimant has to prove that the damage,, loss or delay was certainly
caused by unseaworthiness.
Article IV under 2 HVR provides a long list of force majeure circumstances which result in the carrier
not being liable even though he is in breach of the obligations in Article III HVR. The carrier is not
liable for loss or damage arising or resulting from Article IV under 2:
a) Act, neglect, or default of the master, mariner, pilot, or the servants of the carrier in the
navigation or in the management of the ship;
*This exception has a long history but is heavily criticised. The exception cannot be found in any
convention regarding the carriage of good by air or road. This exception also cannot be found in the
more recent conventions dealing with sea carriage, Hamburg and Rotterdam Rules.
b)
c)
d)
e)
f)
g)
h)
i)
j)
Fire, unless caused the actual fault or privity of the carrier;
Perils, dangers and accident of the sea or other navigable waters;
Act of god;
Act of war;
Act of public enemies, e.g. pirates and terrorist;
Arrest or restraint of princes, rulers or people, or seizure under legal process;
Quarantine restrictions;
Act or omission of the shipper or owner of the goods, his agent or representative;
strikes or lockouts or stoppage or restraint of labour from whatever cause, whether partial or
general;
k) Riots and civil commotions;
l) Wastage in bulk of weight or any other loss or damage arising from inherent defect, quality or
vice of the goods;
An inherent defect is the risk of deterioration of the shipped goods as a result of their natural
behaviour (see page 370 – too much water in the products) in the ordinary course of the voyage
without the intervention of any external accidents or casualty:
a)
b)
c)
d)
Insufficiency of packing;
Insufficiency or inadequacy of marks;
Latent defects not discoverable by due diligence;
Any other cause arising without the actual fault or privity of the carrier, or without the fault or
neglect of the agents or servants of the carrier, but the burden of proof shall be on the person
claiming the benefit of this exception;
11.2.3 Difference liability under HVR, Rotterdam Rules and Hamburg Rules
+During the voyage by sea the carrier has to make and keep the ship seaworthy Article 14 Rotterdam
Rules. This is different from the HVR. Under the BHVR the carrier is only bound to exercise due
diligence to make sure the ship is seaworthy at the begging of the voyage Article III HVR.
+If the master, mariner, pilot, or the servants of the carrier make a fault in the navigation or the
management of the ship, the carrier is not liable under the HVR. Under the Rotterdam Rules and
Hamburg Rules a carrier is always liable for loss. Damage or delay in case of fault of the carrier, his
servants or agents.
+Under the Rotterdam Rules the carrier has to deliver the goods on time, undamaged or lost Article
17 under 1 Rotterdam Rules (Hamburg Rules as well). If the carrier doesn’t fulfil these obligations,
the carrier is liable for damages, except in case of force majeure Article 17 under 3. Force majeure
for the carrier exists in the following circumstances (See page 373):
Unlike the HVR and the Rotterdam Rules, the Hamburg Rules do not contain a long list of defences
allowing the carrier to invoke a force majeure circumstance. There are few specific provisions in the
Hamburg Rules. The carrier is:
-
-
-
Not liable for loss, damage or delay in delivery in case of the carriage of live animals and the
damage resulted from any special risks inherent in that kind of carriage and if the carrier proves
that he has complied with instructions given to him by the shipper;
Is liable for damage to the goods or delay or delay in delivery caused by fir but only if the
claimant proves that the fire arose from fault or neglect on the part of the carrier, his
servants or agents;
Is not liable where loss, damage or delay in delivery resulted from measures to save lives or from
reasonable measures to save property at sea;
11.2.4 Limitation of liability sea carriage
The following table show the limit in liability for the sea carrier in case of damage or loss of the
goods. These amounts do not apply in case of damage as a result of a delay in delivery of the goods
(see page 374) – For all rules ably that they are liable for a maximum amount of ….. SDR per
package/unit or ….. SDR per kilo whichever amount is the highest.
The contracting party can, depending on the weight of the shipment influence the amount for which
a carrier is liable. If the goods are not heavy it makes sense for the contracting party to the contract
of carriage to send for example ten packages even though the goods could be packaged in five
packages. In case the sender ships 10 packages to the goods the carrier is liable for a maximum
amount of 10 times 666.7 SDR (HVR).
Under the Rotterdam Rules and the Hamburg rules, losses caused by a delay delivery of goods are
limited to a maximum of 2.5 times the amount of money paid to the carrier for the transport. The
HVR rules do not cover damages as a result of delay in delivery. Under all three conventions in case a
container is used to consolidate goods, the number of packages or units enumerated in the bill of
lading as packed in the container are the number of packages used to calculate the liability limit.
Breaking the liability limit: the carrier loses his right to limit his liability if the claimant proves that:
-
The loss resulting from the breach of the carrier’s obligations under the Rotterdam Rules was
attributable to a personal act or omission of the carrier;
The act or omission was done with the intent to cause such loss or recklessly and with
knowledge that such loss would probably result Article 61 Rotterdam Rules. Likewise, under the
Hamburg Rules the carrier cannot limit his liability, if it si proven that the loss, damage or delay
in delivery resulted from an act or omission of the carrier done with the intent to cause such
loss, damage or delay, or recklessly and with knowledge such loss, damage or delay would
probably result Article 8 Hamburg Rules;
11.2.5 Jurisdiction under HVR, Hamburg Rules and Rotterdam Rules
The Hague-Visby Rules do not contain jurisdiction provisions. If a case is brought before a court in a
country, the court will have to decide based on the laws regarding jurisdiction of that country
whether the court is competent to decide the case. In the EU Member States this will be
the Brussels I regulation (chapter 12).
*Article 4 Brussel I regulation states as a general rule that proceedings have to be brought before
the courts of the country where the person being sued is domiciled. This results in carrier being sued
in the country where they are domiciled, because it will be the shipper who is the plaintiff and the
carrier the defendant.
However, carriers often put the choice of law and jurisdiction in their bill of lading terms. According
to Article 21 Hamburg Rules the plaintiff, at his option, may institute an action in a court which is
situated one of the following places:
a) The principal place of business or, in the absence thereof, the habitual residence of the
defendant;
b) The place where the contract was mad, provided that the defendant has there a place of
business, branch or agency through which the contract was made;
c) The port of loading or the port of discharge;
d) Any additional place designated for that purpose in the contract of carriage by sea;
Under the Rotterdam Rules the plaintiff has the right to institute judicial proceedings against the
carrier in a competent court within the jurisdiction of which is situated one of the following places
Article 66 Rotterdam Rules:
i.
ii.
iii.
iv.
v.
The domicile of the carrier;
The place of receipt agreed in the contract of carriage;
The place of delivery agreed in the contract of carriage;
The port where the goods are initially loaded on a ship or the port where the goods are finally
discharged from a ship;
In a competence court or courts designated by an agreement between the shipper and the
carrier for the purpose of deciding claims against the carrier.
The plaintiff can choose form one of the forums listed above. Under the Rotterdam Rules an
exclusive choice of court agreement is not allowed. An exclusive choice of court agreement is only
allowed if inserted in a volume contract and meets the requirements laid down in Article 67
Rotterdam rules or after the dispute has arisen.
A volume contract is a contract for the carriage of a specified quantity of goods in a series of
shipments during an agreed period of time. The main requirements for a choice of court agreement
in a volume contract to be valid are:
-
The choice of court agreement has to be individually negotiated or the volume contract has to
contain a prominent statement that there is an exclusive choice of court agreement;
Clearly designates the courts of on Contracting State;
11.3 Air carriage
The main treaties dealing with the liability of an air carrier are the Convention for the Unification of
Certain rules Relating to International Carriage by Air signed in Warsaw (1929) and the convention
for the Unification of Certain Rules for International Carriage by Air signed in Montreal (1999). The
Warsaw convention is becoming less and less important as more and more countries ratify the
Montreal Convention. Both treaties not only deal with damage to goods, delay in delivery of goods
or the loss of goods but also with damages from death, injury to, or lost luggage of passengers.
11.3.1 Scope of the Montreal Convention
The Montreal Convention applies to international carriage between two States Parties to the
Montreal Convention. According to European Regulation No. 889/2002, the Montreal Convention
also applies to national flights. The Montreal Convention applies to all international carriage of:
-
Persons, baggage and cargo;
By aircraft;
-
For a reward, or gratuitously based on a contract, e.g. an airline gives free award flight
to frequently flyer;
This means that a carrier is not liable under the Montreal Convention for death of a stowaway, since
stowaways do not have a contract of carriage with the carrier and so the Montreal Convention does
not apply. The Montreal Convention does apply to free flights, sometimes offered by carriers.
11.3.2 Liability for air carriage
Under the Montreal Convention, a carrier is basically always liable for damage resulting in death or
injury of a passenger. Under Article 17 Montreal Convention, the carrier is liable up to 128,821 SDR
with no possibility to exclude or limit its liability. SDR stands for Special Drawing Rights, which is an
international reserve currency created by the IMF. 128,821 SDR is around 150.000,-.
Under Article 21 under 1 Montreal Convention, for damages above 128,821 SDR, the carrier has
unlimited liability unless it can prove that damage was:
-
Not due to negligence or wrongful act or omission of the carrier, its servant or agents;
Solely due to the negligence or other wrongful act or omission of a third party;
The burden of proof lies with the carrier. If the carrier cannot prove it was not negligent or
committed no wrongful act or omission, then it is liable. If the cargo is lost, damaged or destroyed
during carriage by air, the carrier is liable, Article 18 under 1 Montreal Convention. The carrier is also
liable for damage caused by delay of delivery. However if there is force majeure the carrier is not
liable. There is force majeure if the carrier can prove the loss, damage or destruction is a result of:
a) Inherent defect, quality or vice of the cargo;
b) Defective packing and the packing was preformed by someone other than the carrier;
c) An act of war;
Regarding delay, the carrier is not liable if he prove that he, his servants or agents took all measures
that could reasonably be required to avoid delay or that it was impossible for the carrier
to take such measures.
11.3.3 Difference between the Warsaw Convention and Montreal Convention
The difference between the two Conventions relates to the liability of carriers. The Warsaw
Convention was concluded at a time when flying was still risky. Hence, under the Warsaw
convention, the carrier is not so readily liable in the case of death or injury of a passenger.
Under the Warsaw convention, the carrier is only liable if it cannot be proved that all measures were
taken to avoid the damage. Even if this cannot be proved, the carrier is only liable up to 16,600 SDR
per passenger. If the claimant can prove the damage is caused by wilful misconduct of the carrier or
its employee, then the carrier has unlimited liability.
11.3.4 Limitation of liability for air carriage
Regarding the carriage of cargo, the liability of the carrier in the case of destruction, loss, damage or
delay is limited to 22 SDR per kg. in case the damage to the goods is caused by delay, the carrier is
liable for 22 SDR per kilo with an maximum of 5,346 SDR. In case of destruction, loss, damage or
delay of baggage the liability of the carrier is limited to a maximum of 1,228 SDR. If goods are
destroyed, lost or damage during the transport the liability of the airline is limited to 22 SDR
times the number of kilos.
Unlike the Sea carriage rules, the Montreal Convention has an unbreakable limit in case of
destruction, loss, damage or delay to the goods unless the consignor makes a special declaration of
interest. These limits are only breakable, resulting in unlimited liability of the carrier if the damage
resulted from an act or omission of the carrier done with intent to cause damage or recklessly and
with the knowledge that damage would probably result.
11.3.5 Jurisdiction under the Montreal Convention
Under the Montreal Convention, the plaintiff can choose from the following courts, Article 33:
-
Courts in the country where the carrier is domiciled;
Court in the country where the carrier has its principal place of business;
Court in the country where the carrier and the plaintiff concluded the contract;
Court in the country at the place of destination;
*Under pressure from the United States, Article 33 under 2 Montreal Convention gives the
possibility to bring an action upon the death or injury of a passenger before a court in a country
providing that both the carrier operates services for the carriage of passenger and the passenger has
his permanent residence there.
11.4 Road carriage
The main UN treaty dealing with legal issues regarding the transportation of goods by road is the
CMR. The CMR was signed in 1956 in Geneva. A total of 55 countries, mostly European, have signed
the CMR (see page 384).
11.4.1 Scope of the CMR
Article 1 under 1 CMR states that the CMR only applies to transport contracts by road the goods are
taken over in a different country from the designated place of delivery. However, the CMR also
applies to transport by sea, rail and air in case the goods are not unloaded from the vehicle. The
CMR does not apply to national transport contracts (see page 383-384).
11.4.2 Liability for road carriage
The carrier has the obligation to make sure that goods are delivered without damage and on time.
Road congestion can cause a delay in delivery. In principle, the carrier is liable for the damage
caused by a late delivery of goods. If the delivery is too late, the carrier can sometimes invoke force
majeure. In this case the carrier is not liable for damages.
11.4.3 Limitation liability road carriage
Article 17 under 2 CMR gives a general rule under which circumstances the carrier is relieved of
liability. The carrier is not liable if the loss, damage or delay was caused by the wrongful act or
neglect of the claimant, by the instructions of the claimant, by inherent vice in the goods or through
circumstances which the carrier could not avoid and the consequences of which he was unable to
prevent, e.g. the armed hijacking of the truck.
Article 17 under 4 CMR gives a list of specific circumstances in which the carrier is not liable for
damages. The carrier is not liable for damages if the damages are a result of:
-
The use of an uncovered vehicle (if agreed upon in the consignment note);
Defective packaging;
Handling, stowage or unloading of the goods by the sender;
-
The nature of certain kinds of goods which particularly exposes them to total or partial loss or
damage, especially through breakage, rust, decay or leakage.
Insufficient marking of the packages;
Carriage of livestock;
If the carrier states that the damage was caused by force majeure, the carrier has to prove this. If
the carrier proves that one of the above-mentioned circumstances probably occurred, the claimant
has the right to prove that the damage was not caused by this circumstance.
If the carrier is liable for damage to the goods, the liability is limited to 8,33 SDR per kg. Article 23
under 3 CMR. In the case of delay which the claimant can prove caused the damage, the liability of
the carrier is limited to damage not exceeding the carriage charges. This unbreakable limit can only
be broken if there is wilful misconduct or default which is so serious that it can be considered wilful
misconduct, Article 29 CMR.
11.4.4 Jurisdiction under the CMR
Like the Montreal Convention regarding air carriage and the Rotterdam Rules regarding sea carriage,
the CMR has it own rules governing the choice of court to settle the conflict of an international
contract of carriage. These special jurisdiction rules supersede the general rules found in the
Brussels I recast regulation.
In legal proceeding regarding a contract of carriage under the CMR, the plaintiff may bring an action
in any court or tribunal of a Contracting State designated by agreement between the parties. In
addition, legal proceedings can also be started, according to Article 31 under 1 CMR, in the courts or
tribunals of a country within whose territory:
a) The defendant is ordinarily resident, or has his principal place of business, or the branch or
agency through which the contract of carriage was made;
b) The place where the goods were taken over by the carrier or the place designated for delivery is
situated
This means that a plaintiff generally has at least two jurisdictions to start legal proceedings. Only
when the contract of carriage contains a clause conferring competence on an arbitral tribunal and
the clause provides that the tribunal shall apply the CMR, this arbitral tribunal is solely competent to
deal with the conflict (summary of all transport modes is given in table 11.5 on page 394)
---------------------------------------
Chapter 12: Jurisdiction and Arbitration
There are three important questions that need to be answered in international law when a contract
is concluded. These questions are:
1. Which court of law has jurisdiction? – do the legal proceedings have to brought before a French,
German or Portuguese court?;
2. Is it possible to execute a court judgment in another country? – for example, can a company
execute a judgment from a Spanish court in France;
3. Which law applies to the contract?
- Which country’s law is applicable: French law, German law or perhaps Italian law?
- Which law applies to a tort or obligations arising out of dealings prior to the conclusion
of a contract?
These questions are always answered by a judge according to his national law an the treaties signed
by his country. The European Union has regulations in place to answer these questions. These
regulations are part of the national laws of the Member States. They are applied by all courts in the
European Union. An important point to remember is also that question 1, question 2 and question 3
are three separate questions.
This may result in the possibility of Dutch law being applicable and French court having jurisdiction
or German law applying to a case and a Dutch court having jurisdiction. The obvious problem is that
the Dutch court does not have knowledge of the laws of foreign countries.
If a Dutch court has to apply German law, information can be found quite easily, but if a Dutch court
has to apply Colombian law, the case becomes much more difficult. This situation can often be
avoided by choosing the applicable law and the jurisdiction of the court in the contract of sale.
This chapter will deal with the following questions:
a) Which court has jurisdiction? Meaning the court in which country has jurisdiction Articles 1-35
Brussels I recast.
b) Recognition and enforcement of foreign judgments Articles 35-38 Brussels I recast.
The answer to these questions can be found in Regulation 1215/2012, also known as Brussels I
recast. Council Regulation 1215/2012 is the successor of Council Regulation 44/2001 (Brussel I) and
entered into force on January 2015.
The abolition of exequatur: under the Brussels I recast Regulation, it is no longer necessary to
obtain an exequatur. An exequatur is a permission (court order) of the court of the Member State to
enforce a foreign judgment in that Member State. With this abolition it has become easier to
enforce a foreign judgment.
Changes to the lis pendens provisions: the Brussel recast Regulation and its predecessor have a
simple solution to the situation of the same case being brought before two courts in different
Member States. In this case, the court that was first seized in a dispute has jurisdiction. All other
courts are obliged to defer to the court first seized.
This creates the problem of the so-called “Italian torpedo”. Figure 13.7 (page ….) shows a list with
the clearance rates in the different European countries. The map shows that in Italy this is 1120
days, i.g. it takes on average 1120 days for an Italian court to decide a case. This created the problem
that sometimes a party starts legal proceedings in Italy just to gain time.
Brussel I recast addresses this problem regarding cases with parties who chose an exclusive
jurisdiction clause in their agreement. In these cases, the court of the chosen jurisdiction may
proceed to hear the case even if it was not first seized. Any court of another Member State has to
stay the proceedings until such time as the court seized on the basis of the agreement declares that
is has no jurisdiction under the agreement Article 31 under 2 Brussel I recast.
12.1 Scope Article 1 Brussel I recast
Brussels I recast only applies to civil and commercial matters if the defendant is domiciled in a
Member State, Article 1 Brussels I recast. Brussel I recast does not apply to wills, family law,
bankruptcy, arbitration and social security cases.
12.2 Rules on Jurisdiction
The general rule regarding which court has jurisdiction can be found in Article 4 Brussel I recast.
Article 4 under I Brussel I recast states that the court of law of the Member State in which the
person who is sued is domiciled has jurisdiction. Nationality is not relevant. The criterion is the court
of law of the country where the defendant is domiciled.
Supplement to general rule: Article 7 under 1(a) Brussel I recast (Place of delivery of the goods):
Article 7 under 1(a) Brussels I recast is a supplement to the general rule, resulting in an alternative
court before which a party can start legal proceedings. In matters relating to a contract for the sale
of goods or services, the court in the country where the performance of the obligation takes place
also has jurisdiction. In the case of the sale of goods, the place of performance is in the Member
State where the goods were delivered of should have been delivered.
*So, if an action is aimed at obtaining the payment for the purchase price of the goods, the court at
the place of delivery remains competent and not the court at the place where the payment
had to be effected. If the CISG applies to the contract, then if the buyer is not bound to pay the price
at any other particular place he most pay it to the seller at the seller’s place of business.
In case of the use of an Incoterm in the contract of sale, the place named after the Incoterm is to be
understood as ‘the place of performance of the obligation’ Article 7 Brussels I recast. The place
named behind these Incoterms is the place of performance. In later case, the Court of Justice added
that in order to verify whether the place of delivery is determined, the seized national court must
consider all the relevant terms and clauses of that contract which are capable of clearly identifying
that place, including the terms and clauses which are generally recognized and applied in
international trade or commerce, such as the ICC Incoterms.
Supplement to general rule: Article 7 under 2 Brussels I recast (tort): Article 7 under 2 Brussels I
recast is another supplement to the general rule. Matters relating to a tort can also be brought
before the courts for the place where the harmful event occurred.
Example: a Dutchman goes on a skiing holiday in Austria. He runs over an Italian living in Austria who
breaks his leg and cannot work for six weeks. He sues the Dutchman for damages basing his claim on
the tort the Dutchman allegedly committed. Which court has jurisdiction?
-
According to Article 4 Brussels I recast: the Dutch court has jurisdiction (domicile defendant);
According to Article 7 Brussels I recast: The Austrian court has also jurisdiction (place of tort);
Such cases have bad consequences for the Dutch tourists. Our Italian living in Austria will choos to go
to an Austrian court since he lives there, which means that the Dutchman will incur significant costs:
translation costs if he does not speak German, travelling cost if he has to attend a session of the
court in Austria and cost relating to hiring legal advice in Austria. The Dutchman will not have any
means to avoid this situation (contract – clauses).
It should also be noted that it is sometimes difficult to answer the question: “in which country did
the harmful event occur?”. Suppose French salt mines throw salt in the Rhine resulting in the
destruction of crops in the Netherlands and the pollution of drinking water. Does this harmful event
occur only in France or also in the Netherlands?
‘The place where the harmful event occurred’, in Article 7 under 2 Brussels I recast, must be
understood as being intended to cover both the place where the damage occurred and the place of
the event giving rise to it. This results in the option of the plaintiff to sued the defendant either in
the courts of the place where the damage occurred (the Netherlands) or in the courts of the place
where the event gives rise to and is at the origin of said damage (France).
*In ted has the case o f a publication on the internet, the person whose rights allegedly were
infringed has the option of bringing an action for liability, in respect of all the damage caused. Either
before the courts of the Member State in which the courts of the Member State in which the centre
of his interest is based, Article 7 under 2 Brussel recast.
The person may also, instead o an action for each Member State in the territory of which content
placed online is or has been accessible. Those courts have jurisdiction only in respect of the damage
caused in the territory of the Member State of the court seized.
12.3 Deviation from the general rule
In some cases, the general rule does not apply. This happens when parties choose the court of law
handling their disputes and sometimes the choice of court is not possible or limited.
12.3.1 Choice of court of law, Article 25 Brussels I recast
The choice of the court of law is possible but only if:
- The choice of court is given or evidenced in writing;
- The choice of court is in a form which accords with practices the parties have established
between themselves or is used in international trade;
In the Brussels I recast regulation (Regulation 1215/2012) a specific provision is added regarding a
jurisdiction which forms part of a contract shall be treated as an agreement independent of the
other terms of contract. The validity of the agreement conferring jurisdiction cannot be contested
solely on the ground that the contrast is not valid, Article 25 under 5 Brussels I recast.
It is risky to put one-way dispute resolution clauses in the contract because this is not accepted in all
countries. The validity of one-way jurisdiction clauses under Regulation 1215/2012 is unclear. A oneway jurisdiction clause is binding one party, but not the other, to bring proceedings exclusively in
one jurisdiction. This is very common in commercial contracts where one party has superior
bargaining power and wishes to retain flexibility in the place of proceedings, while limiting any
proceedings brought by the counterparty to a single jurisdiction.
12.3.2 Limitation of choice of court
In the following cases the choice of court is not possible or limited:
1.
2.
3.
4.
Jurisdiction relating to insurance contracts, Articles 10-16 Brussels I recast;
Jurisdiction over consumer contracts, Articles 17-19 Brussels I recast;
Jurisdiction over individual employment contracts, Articles 20-23 Brussels I recast;
Exclusive jurisdiction, Articles 24 Brussels I recast;
12.3.2.1 Jurisdiction relating to insurance contracts: according to Article 11 Brussels I, it is possible
to sue an insurer in courts where the insurer is domiciled but also in courts where the plaintiff is
domiciled. In insurance proceedings the choice of court is only possible after a dispute has arisen.
12.3.2.2 jurisdiction over consumer contracts: a consumer may bring proceedings against the seller
either in the courts of the country where the seller is domiciled or in the courts of the country where
the consumer is domiciled, Article 18 Brussels I recast. Article 19 Brussels I recast states that the
choice of court in consumer contracts is only possible after the dispute has arisen or gives a
consumer more possible courts then he would have according to Articles 17-19 Brussels I recast.
Of course, a German person who buys a care while on holiday in France, can not, after returning to
Germany, sue the French seller in Germany. It is different if the French seller tries to sell the car
using a website on the German market. Article 17 under 1(c) Brussels I recast therefore states that
the seller can only be brought before the court of the country where the consumer is domiciled if
the contract has been concluded with a seller who pursues commercial or professional activities in
the ember State of the consumer.
This becomes especially difficult with the sale of goods or services on the internet. Does the seller on
the internet direct is activities to the country where the consumer is domiciled? (see page 421) To
avoid any misunderstanding, it is not necessary for the application of Article 17 under 1(c) Brussels I
recast that the contract between trader and the consumer was concluded at a distance.
In recent judgment, the Court of justice went a step further. The Court of Justice held that a casual
link between the means employed to direct the commercial activity to the Member State of the
consumer’s domicile, namely the internet site, and the conclusion of the contract with the consumer
is not necessary.
Example: Mr. Emmeck, domiciled in Saarbrücken (Germany) was looking for a car. He bought the car
from Mr. Sabronovic who sells second-hand motor vehicles in Spicheren, a town in France close to
the German border. The car was not working correctly and Mr. Emmeck made claims against Mr.
Sabronovic under the warranty before the District Court of his home town of Saarbücken.
The German courts established that Mr. Sabronovic commercial activity was also directed to
Germany. His website contained the contact details for his business, including French telephone
numbers and a German mobile telephone number, together with the respective international codes.
The German Regional Court was unsure whether there was a causal link between the means
employed to direct commercial activity to the Member State of the consumer’s domicile, namely the
internet sit, and the conclusion of the contract with the consumer.
The Court of Justice held that the fact a business is directly commercial activities to another Member
State in this case through a website is enough for a consumer to invoke his rights under Article 17
under 1(c) Brussels I recast and sue the seller before the court of the place where the
consumer is domiciled.
*A causal relationship between the use of the internet site by the consumer and the conclusion of
the contract with the consumer is not necessary. However, although the causal link is not a
condition, it may nonetheless constitute strong evidence which may be taken into consideration by
the national court to determine whether the activity is in fact directed to the Member State in which
the consumer is domiciled.
12.3.2.3 Jurisdiction over individual employment contracts: According to Article 21 under 1 Brussels
I recast, an employer can be sued by his employee before the courts of the country where the
employer is domiciled or habitually carriers out his work. The choice of court is only possible after
the dispute has arisen or gives the employee a larger choice of courts then he has based on Articles
20-23 Brussels I recast.
Unlike the employee the employer can only start legal proceedings before the court of the country
where the employee is domiciled, Articles 22 Brussels I recast. Difficulties for the employer arise
especially if the employer wants to terminate a contract with an employee who lives in another
country. This happens quite often.
Also in the international transport sector, employees work throughout Europe, making it sometimes
difficult to determine in which country the employee habitually carries out his work. All elements
have to be taken into account to determine in which country the employee habitually carriers out his
work. In deciding in which country the employee habitually carries out his work the following
circumstances are crucial:
-
In which country does the employee perform the transport orders, receives instructions for his
missions and where are the trucks normally located?
In which country is the transport mainly carried out, where are the goods unloaded and which
country does the driver return to after his assignments?
*The following additional criteria also play a role: the nationality of the employee, in which country
the employee pays taxes and has his social insurance, the language of the employment contract, in
which country the salary is paid and in which currency.
12.3.2.4 Exclusive jurisdiction: Article Brussels I recast not only limits the choice of court. Is
also gives the mandatory court of law.
Immovable property: for disputes involving immovable the court in the country where the property
is situated has exclusive jurisdiction.
Validity, nullity or dissolution: for proceedings concerning the validity, nullity or dissolution of legal
persons or companies, the competent court is the court in the country were legal persons or
company have their seat.
Trademarks, patents and designs: disputes regarding trademarks, patents and designs have to be
brought before the court of the country where the deposit or registration are deemed to
have taken place.
12.4 To execute a court judgment in another country
In order to execute a court judgment in another country is important to distinguish two things:
a) The recognition of a judgment of a foreign court, Articles 36-38 Brussels I (paragraph 12.4.1)
b) The enforcement of a judgment in another country, Articles 39-44 Brussels I (paragraph 12.4.2)
The values of the people of a country can be viewed in the laws of country. That is the reason why
laws are different from one country to another. It also means that judgments form other countries
are not easily recognized and enforceable in that country because they are very often based on a
different set of values (see page 426-427).
12.4.1 The recognition of a judgment of a foreign court
Brussels I recast also deals with the recognition and enforcement of judgments of the court of
another EU Member State. According to Article 36 Brussels I recast, a judgment from a court of
another Member State is recognized automatically. According to Article 45 Brussels I recast, under
no circumstances a judgment from another Member State may be reviewed as to its substance. The
only reasons a judgment from another Member State is not recognized are:
1. The recognition is manifestly contrary to public policy;
2. If the defendant did not appear because he was not served with the document which
instituted the proceedings;
3. An irreconcilable judgment in the dispute of a court in the Member State in which recognition is
sought or if the judgment is irreconcilable with an earlier judgment given in another Member
State or in a third State involving the same cause of action;
Brussels I recast only applies to judgments from other EU Member States and not to judgments from
countries outside of the EU. In general, a country does not recognize a judgment from a court of
another country. So, if you have a ruling of a Brazilian court stating that a Chinese or American
defendant has to pay $100.000,- in damages to you, then you cannot enforce this judgment in China
or the US. The legal systems in these countries do not recognize foreign judgments.
A possible solution to this problem is to put an arbitration clause in a contract. Arbitration is solution
of a legal problem outside of a court. In arbitration the dispute is submitted to unbiased third
person(s) designated by the parties to the controversy, who agree in advance to comply with the
award. An award is the decision issued after a hearing at which both parties have an
opportunity to be heard.
Sometimes the use of arbitration is not an option. In these cases the law works, e.g. in noncontractual claims like breach of patent rights. The party breaching the patent in general does not
have any incentive to agree to arbitration as a way of settling the conflict. In some legal systems,
there are also non-arbitral disputes like employment disputes in which going to court is obligatory
(in the Netherlands – possible to use in all disputes).
*A study shows that companies across all sectors settled 47% of their disputes through arbitration
and in 47% of the cases the disputes were settled by legislation before a court. Table 12.1 (see page
429) shows the pros and cons of international arbitration versus litigation.
+Arbitration is only possible if parties agree upon it before (in the contract of sale) or after a dispute
has arisen. The advantage of arbitration is that there is a UN convention regarding the recognition of
awards: the New York Convention 1958. This convention is signed by 149 countries and makes it
easier to enforce an award of a tribunal in these countries.
+Another advantage of arbitration is that parties can make sure that an arbitration panel is neutral.
The parties can choose a country in which the arbitration takes place and make sure that the
arbitrator are impartial. The place of arbitration does not have to be linked to the nationality of the
parties or the country in which the arbitration take place. This is important because there are
countries in which the civil justice systems are more or less corrupt (see page 430).
-International arbitration also has disadvantages. The most important disadvantages are the
expensive cost and the ‘lack of effective sanctions during the arbitral process’. It will cost more than
$35.000 to have a claim decide by the ICC with three arbitrators when the amount in dispute is
$100.000. for an ICC arbitrage with three arbitrators regarding a dispute of $1.000.000, the average
cost will be around $140.000,-.
-the disadvantage of ‘lack of effective sanctions during the arbitral process’ has to do with the fact
that an arbitration panel has limited powers to force a party to cooperate during the proceedings,
e.g. to provide evidence or hand over certain documents. An arbitral tribunal can do little to prevent
delays caused by a party who does not which to cooperate. Unlike national court an arbitration
panel does not have the right to put the uncooperative party in prison or impose a fine.
12.4.2 The enforcement of a judgment in another country
With the Brussels I recast Regulation the person who wants to execute the judgment of another
Member State no longer has to ask permission of a local court in the Member State the execution of
the judgment is sought. A declaration of enforceability is no longer needed.
The recognition of a judgment of a court of another EU Member State is automatically enforceable
in another EU Member State. However, the party against whom the enforcement is sought has the
possibility to ask the enforcement of a judgment to be refused where one of the grounds referred to
in Article 45 Brussels I recast exits. It states that the recognition of a judgment shall be refused if:\
If the party against whom a judgment is enforced has the opinion that the judgement is, for
example, contrary to public policy, it is up to the party against whom the judgment is enforced to go
to court. So, the only reasons to stop the execution of a judgment from an EU Member State are:
arguing that formalities have nor been respected and the judgment therefore is not enforceable, or
arguing that the judgment should not have been recognized on the grounds named in
Article 45 Brussels recast.
Chapter 13: Applicable law
A court deciding a case always start with the question of whether it is competent to decide a case
(chapter 12) and then moves on to the question of which law of which country should be applied to
the case. This is logical order because if the court decides it is not competent in a certain case, the
answer of that court to the question what law should be applied becomes irrelevant. The applicable
law is the central the in this chapter.
Regulation 538/2008 on the law applicable to contractual obligations (Rome I) answers the question
of which law, i.e. the law of which country applies to the contract. Regulation 864/2007 on the law
applicable to non-contractual obligations (Rome II) does the same for non-contractual obligations.
13.1 The scope of Rome I
Rome I only applies to international contracts. If a German company from Hamburg buys 100
televisions from a company in Munich and the delivery takes also place in Germany, the regulation
does not apply. German law is applicable. Article I under 2 Rome I list cases which are excluded from
the scope of the regulation:
-
Regulation Custom matters;
Administrative matters;
Matrimonial law
Obligations arising out of dealings prior to the contract (Rome II Regulation applies
to this situation)
The Rome I Regulation does not give rules of substantive law. One will not find an answer to
questions like: ‘Is there a contract?’, ‘Do I have to pay damages?’ or ‘Do I have to take delivery if the
delivery is too late?’ Rome I only answers the question: ‘Wich law applies to the contract? ’ If the
answer to that question is ‘French law’ for example, then one has to look in French substantive law
to find the answer to the above questions.
13.1.1 Universal application
Universal application means that when applying the rules of Rome I, a court of an EU Member State
comes to the conclusion that the law of non-EU Member State applies, the law system of this nonEU Member State has to be applied to the contract.
Example: a Spanish court applies Rome I in a certain case. According to the rules in Rome I, Egyptian
law should be applied. The Spanish court then has to apply Egyptian law. So, it is very well possible
that a Dutch court has to apply French or German law. Or, as in this case, a Spanish court
has apply Egyptian law.
13.1.2 Applicable law
The general rule in Rome I is that parties decide themselves what law applies to a contract, Article 3
Rome I. if parties agree to French law and a Dutch court has jurisdiction, the Dutch court is obliged
to apply French law. The choice of the law of a third country is also possible. If a French company
enters into an agreement with a German company, it is possible for the parties to agree that Belgian
law applies to their contract. If the French company does not want German law to apply and the
German company does not French law to apply, a compromise can be chosen (Belgian law).
The choice of law can be made expressly or has to be clearly demonstrated by the terms of the
contract, Article 3 under 1. There is no express requirement for the choice of law to be in writing, so
an oral choice of law, although sometimes difficult to prove, is valid.
The parties to a contract may at any time agree to subject the contract to a law other than that
which previously governed it, Article 3 under 2 Rome I. So, even after the court proceedings started,
it is possible for the parties, if no choice of law was made, to agree that the law of a certain country
applies to their contracts. According to an international survey by Queen Mary University, the most
important factor for the choice of law is the perceived neutrality and impartiality of the legal system,
66% (see page 444).
The same research from the Queen Mary University shows that most companies prefer the law of
their home country followed by a preference for English law (see page 445). As reasons for their
choice of law, companies referred to ‘familiarity’, ‘predictability’ and ‘foreseeability’ or ‘certainty’.
They also referred to the existence of a ‘well-developed jurisprudence’ and ‘international
acceptance’.
In 2014, Hogans Lovell, an American law firm, published a study Global Currents: Trends in Complex
Cross-Border disputes about cross-border disputes. They conducted interviews among 146 general
counsels, senior lawyers, and executives from multinationals. The study showed that the main
sources of cross-border disputes where disputes with customers, suppliers and regulatory entities.
*Surprisingly the conflicts vary according to the region in which the business is conducted as can be
seen from the following figure (see page 445). Most conflicts are with customers but conflicts with
competitors are much higher in Europe than in the Middle East or America.
The study also looked into the question in which areas of law cross-border disputes most frequently
occurred. The five most frequent areas of law involved are: commercial/contract disputes,
intellectual property, competition and anti-trust (chapter 4), product liability (chapter 9) and
corporate transactions, including and acquisition (see page 447).
Figure 13.7 (see page 448) shows the disposition time in the EU countries. The disposition time is the
number of days it takes the court of first instance to reach a verdict in a litigious civil case. Not that a
complicated case may take longer and a simple case may take less time.
Although parties can decide themselves what law applies to a contract, there are certain limits.
Sometimes the choice of law is exhaustive. Parties can only choose the applicable law of a defined
country or countries. There are three types of rules of law which limit the possibility to choose the
applicable law:
1) Rules which apply to groups of people who have in a lot of countries extra protection by law
(consumers, employees and insurance policy holders) or when there are formal requirement for
the contract (13.1.4);
2) Rules of law from which parties do not have the freedom to deviate from are so-called
overriding mandatory provision, Article 9 Rome I (13.1.5);
3) Mandatory EU law, Article 3 under 4 Rome I (13.1.6);
13.1.3 Groups of contracting parties with extra protection
There are groups of people whose position in negotiating a contract is much weaker than the person
or company they do business with. If, for example, a consumer goes to a store to buy a computer, it
is almost impossible for the consumer to negotiate what law applies to the contract with the
salesperson. The same goes for employees entering into an employment contract. Rome I introduces
rules giving extra protection regarding the choice of law to these groups of people.
13.1.3.1 Carriage of passengers, Article 5 under 2 Rome I: the law applicable to a contract for the
carriage e of passengers in which the applicable law has not been chosen by the parties is the law of
the country where the passenger has his habitual residence. If the parties want the law of specific
country to apply to their contract for the carriage of passengers, the parties can choose form a
limited list. Parties can only choose the law of the country where:
a)
b)
c)
d)
e)
The passenger has his habitual residence;
The carrier has his habitual residence;
The carrier has his place of central administration;
The place of departure is situated;
The place of destination is situated;
Article 5 under 1 Rome I states that the law applicable to carriage of goods is the law of the country
of habitual residence of the carrier. Article 5 under 1 Rome I does not apply to most contracts of
carriage because many conventions dealing with the carriage of good, e.g. CMR treaty (road),
Warsaw Treaty (air), Hague-Visby Rules (sea), have their own rules regarding the law applicable to
the contract of carriage of goods.
13.1.3.2 Insurance contracts, Article 7 under Rome I: there is a limited choice of applicable law
for insurance contracts. Parties are free to choose the law applicable to their insurance contract if
the contract covers a large risk, Article 7 under 1 Rome I. large risk means all insurance contracts
pertaining to:
-
The damage to or loss of Railway rolling stock;
The damage to or loss of Aircraft;
The damage to or loss of Ships (sea, lake and river and canal vessels);
Large companies as policy-holders;
A large company is a company which fulfils two of the following three criteria: balance-sheet total –
6,2 million; net turnover – 12,8 million; average number of employees during the financial year 250;
In other cases, i.e. insurance contracts with small companies and consumers, the applicable law to
an insurance contract can be found in Article 7 under 3 Rome I. according to this law, the parties can
choose on of the following laws:
-
The law of the Member State where the risk is situated at the time of conclusion of the contract;
The law of the country where the policy holder has his habitual residence;
In the case of life insurance, the law of the Member State of which the policy holder is national;
*if no applicable law has been chosen by the parties that contract is governed by the law of the
Member State in which the risk is situated at the time of conclusion of the contract.
13.1.3.3 Consumer contracts, Articles 6 Rome I: a contract concluded between a natural person, for
a purpose which can be regarded as being outside his trade or profession (the consumer), and
another person acting in the exercise of his trade or profession (the professional) the contract is
governed by the law of the country where the consumers has his habitual residence, Article 6 under
1 Rome I, provided that the professional:
a) Pursues his commercial or professional activities in the country where the consumer has
habitual residence, or;
b) Directs such activities by any means to that country or to several countries including that
specific country;
*It is possible for a consumer and a professional to choose the law applicable to their contract, but
such a choice may not deprive the consumer of the protection afforded to him by the law in the
country where the consumer has his habitual residence, Article 6 under 2 Rome I.
Obstacles for consumers:
13.1.3.4 employment contracts, Article 8 Rome I: parties are free to choose the law applicable to
individual employment contracts as long as it does not results in depriving the employee of the
protection afforded to him by the law of the country the employee habitually carriers out his work,
Article 8 under 1 Rome . if parties do not choose the law applicable to the employment contract, the
law of the country in which the employee habitually carries out his work is applicable, Article 8
under 2 Rome I (see 12.3.2.3).
*It is possible to choose the law which applies to an employment contract. For example, an
American company who is active in the Netherlands can put a clause in the contracts with its Dutch
employees that ‘American law is applicable to this contract’. However, there are rules under Dutch
law which protect employees in the Netherlands. It is not possible to derogate from these rules, so
these rules have to be applied to the employment contracts with the Dutch employees.
In the transport sector there is fierce competition and companies form Eastern E urope have a
competition advantage because their wages are much lower. There are transport companies in the
Netherlands and Germany who hire Polish or Romanian drivers in order to pay lower wages. The
question is whether this is possible.
It is not possible to choose the law of a country which results in depriving the employee of the
protection of the country in which or from which the employee habitually carriers out his work in
performance of the contract. The law applicable to an employment contract can be found applying
the following three criteria:
1. the law of the country in which the employee habitually carries out his work, Article 8 under 2
Rome I: so, if someone lives in the Netherlands and works in Belgium, Belgian law applies to the
contract because he habitually carries out his work in Belgium. Sometimes it is not so easy to
determine where ‘the employee habitually carries out his work’ (see page 460).
2. If the country in which the employee habitually carries out his work cannot be established, the
law of the country in which the employer had his place of business through which the employee
was engaged applies, Article 8 under 3 Rome I: only in cases where the court dealing with the case
is npt in a position to determine the country in which the work is habitually carried out should the
court look at the second criteria.
3. Exception: It is possible that from the circumstances as a whole that the contract is more closely
connected with another country, Article 8 under 4 Rome I: the Court of Justice held that a national
court should first apply the criteria mentioned under 1 and 2 but it is possible that significant
country other than the country where the employee carriers out his work habitually or the country
in which the employ was engaged.
So, even where an employee carriers out the work in performance of the contract habitually, for a
lengthy period and without interruption, in the same country, the national court may disregard the
law of the country a where the work is habitually carried out if it appears from the circumstances as
a whole that the contract is more closely connected with another country
*the circumstances taken into account are the country in which the employee pays his income taxes
from his activity and the country in which he is covered by a social security scheme and pension,
sickness insurance and invalidity schemes.
13.1.3.5 Formal validity, Article 11 Rome I: sometimes there are formal validities for a contract of a
clause in a contract to be valid. For example, not all contractual clauses are valid when they are
made orally. Some contractual clauses have to be in writing to be valid. Under Dutch law, the trial
period in an employment contract is only valid if it is in writing.
The employment contract exist and is valid, because an employment contract can be entered orally
but the clause is not since it is not in writing. Immovable property or a tenancy of immovable
property is subject to the requirements of the form of the law of the country where the
property is situated.
13.1.4 Mandatory provisions in national law
The second category of rules of law from which parties do not have the freedom to deviate are the
so-called overriding mandatory provision, /article 9 Rome I. Under Dutch law, examples of
mandatory provisions are the obligation for the employer to pay the minimum wage and to ask
permission from a governmental agency or cantonal court to fire an employee.
The section regarding contractual standard terms and conditions in the Dutch Civil Code Article
6:231-6:247 DCC also has a territorial scope. This section applies to contracts between parties who
both act in the course of their professional practice or business when entering into the contract and
who both have their domicile (habitual residence) in the Netherlands, irrespective of the law that is
governing their contract.
13.1.5 Mandatory EU law, Article 3 under 4 Rome I
In 2000, the European Court of Justice decided a case between Ingmar and Eaton. In this case, there
were legal proceeding between an agent from the UK and its principal form California (USA). Parties
had chosen in their contract that the law of the state of California would apply to their contract. In
the European Union there is an Agency Regulation. This regulation 86/653 aims to protect the agent,
the ECJ ruled that there is no doubt that Directive 86/653 gives the possibility to ‘refuse to
recognize’ such a cluse, as:
-
The law chosen by the parties (in this case the law of California) does not provide for mandatory
indemnity or compensation for the agent after termination of the contract;
The foreign court will not apply the mandatory provisions of European and English law, and will
reject the agent’s claim.
Another example: A US company wants to give a Polish company a licence to produce and sell
certain goods worldwide. The only country to which the Polish company cannot sell is Cuba. The
reason is that the US has an embargo against Cuba since the 1960s (Helms/Burton Act).
The EU is very unhappy with the boycott of Cuba and adopted Regulation 2271/96 in 1996. Article 5
of the EU Regulation forbids nationals from Member States to comply with the Helms/Burton Act. A
clause in contract which forbids doing business with Cuba is not valid. The regulation goes even
further and states that if a person has damages because of another person abides by the Helms/
Burton Act, the person who suffered damages is entitled to recover any damages.
*Abiding by an embargo is not always forbidden. A clause in a contract says that the seller should
apply a UN embargo, for example against North Korea or Iran is acceptable in a contract.
13.1.6 No choice of applicable law, Article 4 Rome I
If a choice of law has not been made in a contract, Article 4 Rome I determines the applicable law. In
Article 4 under 1 Rome I, there is a list of kinds of contract and the applicable law to that contract.
Article 4 under 1 Rome I:
a) A contract for the sale of goods shall be governed by the law of the country where the seller has
his habitual residence:
b) A contract for the provision of services shall be governed by the law of the country where the
service provider has his habitual residence;
c) A contract relating to tenancy of immovable property shall be governed by the law of the
country where the property is situated;
d) A franchise contract shall be governed by the law of the country where the distribution has his
habitual residence;
e) A distribution contract shall be governed by the law of the country where the distributor has his
habitual residence;
f) A contract for the sale of goods by action shall be governed by the law of the county where the
auction takes o effect the characteristic performance has its habitual residence;
*if a contract is not covered in the list of Article 4 Rome I, then the law of the country applies where
the party who is required to effect the characteristic performance has its habitual residence, Article
4 under 2 Rome I.
13.1.7 Relation between Rome I and CISG
Article 25 Rome I states that the Rome I regulation does not endanger the application of
international conventions. One of these conventions is the CISG. As a result, it is sometimes not
necessary to find the applicable law in case of contracts of sale of goods between parties whose
places of business are in different countries.
This depends on the legal question at hand and whether the buyer and seller have their business in
countries who signed the CISG. Article 1 CISG states, ‘This Convention applies to contracts of slae of
goods between parties whose places of business are in different States:
a) When the States are Contracting States;
b) When the rules of private international law (PIL) lead to the application of the law of a
‘Contracting State’ (see page 468).
If there is a contract of sale between a French seller and a Dutch buyer and a question arises
regarding the formation of the contract or the buyer’s rights, the CISG should be applied
immediately and it is not necessary to find the applicable law (both signed CISG). However, to decide
whether the ownership of the goods passed from the seller to the buyer, the relevant law has to be
determined by applying Rome I. the CISG contains no rules regarding the transfer of property. Rome
I should also be applied if the parties excluded the application of the CISG in their contracts.
13.2 Law applicable to a tor or other non-contractual obligations (Rome II)
Whereas Rome I deals with the question of what law applies to a contract, Rome II answers the
question of what law applies to a tort or other non-contractual obligation:
13.2.1 Scope Rome II
Rome II deals with the applicable law to non-contractual obligations like:
-
Tort, Article 4 Rome II;
Product liability, Article 5 Rome II;
Unfair competition, Article 6 Rome II;
Infringement of intellectual property, Article 8 Rome II;
Industrial action, Article 9 Rome II;
Unjust enrichment, Article 10 Rome II;
Negotiorum gestio, Article 11 Rome II;
Culpa contrahendo, Article 12 Rome II;
13.2.2 Applicable law, Rome II
According to Article 14 Rome II, parties are free to submit non-contractual obligations to the
law of their choice, but:
-
Only by agreement entered after the damage occurred, or;
If all parties are pursuing a commercial activity before the damage occurred, a choice of
law is also possible;
If a company does business with consumers a clause of choice of law for non-contractual obligations
in a contract of sale is not valid. Furthermore, a choice of law is also not possible if all elements to a
situation are connected to a certain country. When a French truck driver from a French company has
an accident in France, a choice of law is not possible.
13.2.2.1 Tort, Article 4 Rome II: For a tort, the law of the country where direct damages occur is
applicable, and not the law of the country where the indirect consequences occur Article 4 under 1
Rome II. In the event of a traffic accident, for example, the place of the direct damage is the place
where the collision occurs even if the financial damages are sustained in another country.
However, Article 4 under 2 Rome II states that if the person claimed to be liable and the person
sustaining damage both have their habitual residence in the same country at the time when the
damage occurs, the law of that country shall apply. Article 4 under 3 Rome II also ads that if it is clear
from all the circumstances of the case that the tort/delict is manifestly more closely connected with
a country the law of that other country shall apply (see page 470).
13.2.2.2 Product liability, Article 5 Rome II: The Council adopted Directive 85/374 regarding product
liability in the EU. In the EU, a producer from a country of the European Union is liable for damages
caused by a defective product. If a product is produced outside the EU, the importer in the EU of
that product is liable if the product is defective.
The individual Member States of the EU transposed the Directive in their national law. So, within the
EU, the material laws regarding product liability are the same in all Member States.
*Article 5 Rome II states that the law applies of the country in which the person sustaining the
damage had his residence if the product was marketed in that country. If the product was acquired
in another country and marketed there the law of that country applies. Failing that, the country in
which the damages occurred applies.
13.2.2.3 Unfair competition, Article 6 Rome II: the law applicable to non-contractual obligations
(mostly a tort) arising from unfair competition is the law of the country where competitive relations
or the collective interests of consumers are, or are likely to be, affected.
13.2.2.4 Infringement intellectual property, Article 8 Rome II: the law applicable to non-contractual
obligations arising from infringement of intellectual property, e.g. copyright and trademark, is the
law of the country in which protection is claimed.
13.2.2.5 Industrial action, Article 9 Rome II: for unions or individual workers who are liable for
damages caused by industrial action (strikes, blocking the entrance of a company or occupying a
factory), the law of the country where the industrial action is pending or was carried is applicable.
13.2.2.6 Unjust enrichment, Article 10 Rome II: Unjust enrichment occurs if unjustly or by chance a
person is enriched at the expense of another person. Unjust enrichment includes payment of
amounts wrongly received. If an unjust enrichment claim arises out of or is closely connected to a
previous contract or tort, the unjust enrichment claim is governed by the law that governs the
contract or tort Article 10 under 1 Rome II.
*If there is no previous contract or tort and parties have their habitual residence in the same country
the law of that country applies Article 10 under 2 Rome II. If there is no previous contract or tort and
the parties do not have their habitual residence in the same country the law of the country in which
the act was performed will apply Article 10 under 3 Rome II.
13.2.2.7 Negotiorum gestio (spontaneous agency), Article 11 Rome II: this is a form of spontaneous
agency in which the agents acts without consent of the principal. The law of the country where this
non-contractual obligation is most closely connected to is applicable (see page 472).
13.2.2.8 Culpa in contrahendo (Pre-contractual period), Article 12 Rome II: In some legal systems a
party can be liable to pay damages if a contract is not concluded. This can be the case if a party does
not negotiate in good faith. In these cases, according to Article 12 Rome II, the law of the county that
would have been applicable if the contract had been concluded applies to the claim for damages
resulting from negotiating in bad faith.
In most European countries, with the notable exception of the English law, negotiations are subject
to a duty of good faith. Negotiating in good faith means, for example, that the party who negotiates
with the only aim to keep the other party occupied and incurring costs does not negotiate in good
faith. English law does not have the general obligation to negotiate in good faith. The court of
Appeal held that ‘no one could tell whether the negotiations would be successful or would fall
through; or if successful what the result would be’.
In Dutch law, the rule is that parties are free to negotiate and conclude or decide not to conclude a
contract. As a result, a party can claim damages only in exceptional circumstances if a contract is not
conclude. This is only the case if the party was and could be confident that the contract would be
concluded.
If a party could be confident that the contract would be concluded, the party can claim
compensation for the cost related to the negotiations, e.g. costs of making estimates, travelling
expenses and other costs but also loss of profit because the agreement was not concluded. Even if it
is legitimate to terminate the negotiations, the party terminating a the negotiations can be liable to
pay such damages under Dutch law.
Chapter 15: Payment Conditions
The transfer of property can take place by physically handing over the goods if the goods are shipped
from China to the United Kingdom, the goods are at sea for months and during this time the physical
handing over the goods is not possible. If the goods are transported by sea, a bill of lading can be
used to transfer the property of the goods. There are five ways of payment often used in
international trade:
1.
2.
3.
4.
5.
Payment in advance
Payment in open account
Cheque
Bill of exchange
Letter of credit or Documentary Collection
*With some means of payment, the seller has more certainty of receiving the money owed to him by
the buyer than with other means of payment. Table 15.1 (see page 504) shows the main features of
the methods.
15.1 Payment in advance
In case of advance payment, the buyer order the goods and before receiving the goods the buyer
orders his bank to make the payment. The advantage is that it is a fast and quick way of payment,
the disadvantage for the buyer is that the buyer risks not receiving his goods. Most of the time,
sellers want part of the payment in advance. in some businesses, paying in advance is very common.
15.2 Payment in open account
This is the opposite of advance payment. It can be best described as ‘buy now, pay later’. The
exporter gets paid by the importer after the goods have been shipped or delivered. Depending on
the agreement between the exporter and the importer, the payment is made at sight of the bill of
lading or for example, one month after shipment dat. There is usually a long-standing or regular
business relationship between the two parties. The exporter bears the risk that the importer
does not or cannot pay.
*It is wis to state clearly on the invoice when payment has to take place. The words ‘payment after
30 days’ is not clear, because the question is: 30 days after what? Is it after the invoice is send, after
the goods have been shipped or after the goods have been received?
15.3 Cheque
Payment by cheque is popular in some countries but not so much in other countries such as the
Netherlands. The reasons are that cheques are expensive, slow and, most importantly, the seller
runs the risk that the buyer does not have enough funds in the bank. This last problem can be solved
with ac bank cheque. A bank cheque is a cheque signed by a bank.
Instead of the buyers promising to pay, the bank promises to pay. The buyer buys the cheque from
the bank and is immediately debited by the bank.
15.4 Bill of exchange
A cheque is for immediate payment: a bill of exchange is way for the seller to pay, but also extends
credit to the buyer (see page 507):
1) Seller and buyer enter into a contract of sale. In the contract of sale, parties agree that the goods
will be delivered on 1/4/2015 and they also agree on A: payment of 170,000 on 1/10 in open
account within 180 days after the invoice date.
2) The seller makes the bill of exchange on 5/4/2015 and sends it to the buyer.
3) On 1/5/2015, the buyer accepts the bill of exchange by signing it and sends it back to the seller.
4) On 15/5/2015, the seller sells the bill to a bank for 160.000. B: the bank can ask the acceptance
of the bill of exchange from the buyer. This way, the bank has confirmation that the debt exists
and the buyer will pay on 1/10/2015. The bill of exchange can be sold to a bank but also to a
business relation: C.
5) On 1/10/2015, the buyer pays 170.000 to the bank of the seller. If the buyer does not pay (6),
the bank can ask the 170.000 from the seller.
15.5 Letter of credit or Documentary Collection
In 2016 around 3 trillion was paid through a documentary credit. This is around 12% of the total
international trade. This percentage is expected to become lower and amount to around 9% of the
total international trade in 2026 as open account sales increase. The reason for the move away from
traditional trade finance in favour of payment in open account are mainly the high cost of letters of
credit and documentary collection making these instruments especially unattractive for small-ticket
transactions and the rising trust in buyers of the goods.
*However, a major problem for sellers are buyers who are unable or unwilling to pay the bill. A
solution for the seller can be to only accept payment by letter of credit.
The International Chamber of Commerce (ICC) publishes a set of international rules which are used
by banks worldwide when dealing with letters of credit these rules are the ‘Uniform Customs and
Practice for Documentary Credits (UCP)’, figure 15.6 (page 508).
The seller and buyer enter into a contract of sale (1). They agree on payment by letter of credit. Inn
the contract, they also agree which bank will open the letter of credit. The buyer contacts his bank
and asks (2) them to open the letter of credit. The bank opens the letter of credit and sends the
seller a letter ‘(3)A’, stating that, if the seller presents certain documents before a certain date, the
issuing bank will pay a certain amount of money.
The documents can be a bill of lading, an insurance certificate or a Certificate of Origin. The sellers
start to produce the goods and get the documents (4). The seller then present the documents to the
issuing bank (5) and gets paid. The issuing ban informs the buyer that the documents have arrived
and debits the account of his client, the buyer (6).
The seller has to take the documents to a branch of the issuing bank. This can be a problem if there
is no branch near the place of business of the seller. To solve this problem, the buyer and seller can
agree that they will use an advising or confirming bank near the place of business of the seller. The
issuing bank then, instead of singing the letter ‘3(A)’ directly to the seller, sends the letter to advising
or confirming bank ‘3(B)’, which send it to the seller.
If the seller has the documents, he can present them to the advising or confirming bank which pays
the seller and then sends the documents to the issuing bank in order to get the money paid to the
seller plus a commission from the issuing bank.
The difference between an advising bank and a confirming bank is that an advising bank only acts as
an agent for the issuing bank. An advising bank is only under the obligation to take reasonable care
to verify the authenticity of the documents present to them. The advising bank will only pay the
beneficiary after they received the funds from the issuing bank. If a bank acts as a confirming bank,
the confirming bank assumes the same responsibilities as the issuing bank, including the obligation
to pay if the documents are presented.
Using a Letter of credit as a way of paying is expensive. The issuing bank has to check that the
documents given by the seller correspond with the documents asked for in the letter of credit which
has been sent to the seller. This is not an easy task, because some documents can be in a foreign
language.
Using a confirming/advertising bank is more expensive, because there are two banks who want to
make money. The use of a conforming bank is more expensive than the use of an advising bank. This
is because the confirming bank runs a bigger risk.
+The main advantage of a letter of credit is that the seller has the guarantee from a bank and not
the buyer that he will get paid if he hands over the documents.
+Another advantage is that if the buyer’s bank opens a letter of credit if the bank is very sure the
buyer will be able to pay after the bank has paid the seller. Banks often block the amount they
opened the letter of credit for on the bank account of the buyer. If a buyer wants a letter of credit
opened for $100.000, the bank blocks the bank account of the buyer for this amount.
(for the prices of “A letter of credit” see page 510)
15.7 Standard forms of documentation
When making the payment for product on behalf of its customer, the issuing bank verifies that all
documents conform to the terms and conditions of the letter of credit. The UCP 600 rules give a
precise description of what the documents entail. Although the letter of credit can require an array
of documents i.e. packing list, certificate of inspection, the most common documents include:
15.6.1 Commercial invoice, Article 18 UCP600
A commercial invoice is the bill for the goods. A commercial invoice includes a description of
merchandise, price, Incoterm, and the name and address of buyer and seller. The information on the
invoice must correspond exactly with the description in the letter of credit.
15.6.2 Clean bill of lading, Article 20-23 UCP600
A bill of lading is a document evidencing the receipt of goods for shipment and issued by a ship
owner engaged in the business of transporting goods over sea (see 11.2)
15.6.3 Insurance certificate, Article 28 UCP600
The issuing bank will only ask for an insurance certificate when it is up to the seller to insure the
goods. If it is a CIF contract, the seller has to insure the goods for the buyer and then an insurance
certificate is asked on behalf of the buyer by the issuing bank.
*15.6.4 Certificate of Origin
The most important function of a certificate is that it is used for classifying the goods in the customs
regulations of the importing country – this way it is clear how much duty has to be paid. A Certificate
of Origin can also be important for import quota purposes and for statistical purposes. For
shipments of vegetables or plants, it may also be important for health regulations.
15.7 Types of letter of credit
There are several variations on the standard letter of credit:
Revocable/irrevocable letter of credit: almost without exception, all letters of credit are designated
‘Irrevocable’. Revocable letter of credit is not acceptable for the seller. Article 3 UCP states that a
letter of credit is irrevocable even if there is no indication to that effect. So, if the letter of credit
does not mention that the letter of credit is revocable, the letter of credit is irrevocable.
There are two forms of irrevocable letters of credit: the unconfirmed letter of credit and the
confirmed letter of credit. As explained before, in a confirmed letter of credit the confirming banks
adds its guarantee to pay the seller to the payment guarantee of the buyer’s issuing bank, which is
not the case in an unconfirmed letter of credit.
Standby letter of credit: while the ‘normal’ letter of credit serves as the primary payment
mechanism for a transaction, the standby letter of credit serves as a secondary payment mechanism.
A bank issues a standby letter of credit on behalf of a customer to provide assurances of his ability to
preform under the terms of a contract with the beneficiary (seller).
In cases where the applicant (buyer) has not performed his obligation, the beneficiary (seller) is able
to draw under the credit by presenting a draft and copies of invoices to the bank. The bank is obliged
to make payments if the documents presented comply with the terms of the standby letter of credit.
Transferable letter of credit: this type of letter of credit allows the beneficiary (seller) to transfer all
or part of the proceeds of the original letter of credit to second beneficiary. The letter of credit must
state clearly that it is transferable.
Back-to-back letter of credit: this letter of credit is opened based on an already existing, nontransferable letter of credit, used as collateral. A seller receives a letter of credit rom the buyer and
then opens another letter of credit in favour of his supplier. The first letter of credit serves as
collateral for the second credit.
Revolving letter of credit: with a revolving letter of credit, the issuing bank restores the credit to its
original amount once it has been drawn down. A buyer, the client of the issuing bank, has, for
example, the agreement with his bank that the bank is willing to issue 10 million euro in letters of
credit. If the client uses 2 million euro for a letter of credit, the client can again ask the bank to issue
for up to 10 million euro in letters of credit after the 2 million euro is paid to the beneficiary.
Red clause letter of credit: Red Clause letter of credit provides the beneficiary (seller) with cash
prior to shipment to finance production of the goods. The buyer (applicant), in essence, extends
financing to the beneficiary (seller) and incurs the risk for the advanced credit.
15.8 Common defects in letter of credit documentation
Many of the documents presented by the seller to the issuing bank contain discrepancies. A
discrepancy is an irregularity in the documents that causes them to be in non-compliance with the
letter of credit. A letter of credit cannot be altered without the consent of the buyer, the customer
of the issuing bank, and the bank has no obligation to pay the seller if the documents are incorrect.
The most common discrepancies between the letter of credit and supporting documents are:
-
The letter of credit has expired when the documents are presented;
The bill of lading shows a delivery of the goods prior to, or after the range stated in
the letter of credit;
-
An inconsistent description of the goods;
Errors in insurance documents;
The amount of goods on the invoice is not the same as the amount mentioned in
the letter of credit;
The ports of loading and destination are not the same as specified in the letter of credit;
A document required bye the credit is not presented;
The names on the presented documents are not exactly the same as the description in
the letter of credit;
The invoice is not signed as stipulated in the letter of credit;
The shipment schedule cannot be met;
The quantity or quality of the product is not the same as agreed upon in the contract of sale;
15.9 Risks using letter of credit
The greatest risk using a letter of credit is fraud, e.g. forging a Certificate of Origin or purposefully
putting an incorrect date of loading of the goods on the bill of lading. If fraud is established, the bank
does not have to pay under the letter of credit. The bank is not under the b=obligation to pay in case
of fraud (is a separate transaction from the contract of sale).
As a result, the seller under a letter of credit transaction is required to tender strictly complying
documents in order to be entitled to receive payment. The only exception may be where the
discrepancy is insignificant or trivial such that it cannot be regarded as material. The bank, in its turn,
has to examine the presentation of the documents in order to determine whether or not the
documents appear to constitute a complying presentation, Article 14 under a UCP600.
Also, a bank assumes no liability or responsibility for the form, sufficiency =, accurary, genuineness
or falsification of a document. Nor does it, according to Article 34 UCP 600, Assume any liability or
responsibility for the description, quantity, weight, quality, condition, packing, delivery, value or
existence of the goods, services or other performance represented by any document.
So the buyer under a letter of credit is only sure of one thing: if the complying documents are given
to the bank, the bank will pay the seller. When a bank determines that a presentation is complying,
it must honour payment, regardless of any disputes between the beneficiary (seller) and the
applicant (buyer). A bank has the obligation to examen the documents ‘on their face’ to determine if
the documents appear to constitute a complying presentation.
The reason for this approach of an LC is the idea that an LC should be ‘as good as cash’. One of the
very few exceptions a bank can f=refuse to pay under an LC is in case of fraud. To successfully
prevent payment on the basis of the fraud exception it must be established that:
a) That the beneficiary could not honestly have believed in the validity of its demands under
the letter of credit;
b) That the bank was aware of the fraud;
15.10 Documentary Collection
The difference between a letter of credit and Documentary Collection is that the bank does not
guarantee payment. With /documentary Collection the bank only acts as a channel for the
documents. Only if authorized by the buyer may the bank take money out of the buyer’s account
and pay the seller.
Guarantees or bank guarantees are not exactly the same as a letter of credit. The main difference is
that an LC is a promise form the bank to pay the seller if certain documents are handed over to the
bank before a certain dat. A bank guarantee is a promise form the bank to the seller that, if the
buyer does not pay, the bank will pay. Both instruments show the seller that the ability of the buyer
to pay the seller
*Documentary Collections do not provide the same level of security as letters of credit since the
bank does not guarantee the payment. Banks charge lower fees for Documentary Collection than for
the opening a letter of credit because they have less risks.
If the buyer and seller agree in the contract of sale (1) that the buyer will pay if the documents are
given to him, the next step is the seller instructing his bank (2), the remitting bank, to forward
documents related to the export of goods of the buyer’s bank (3), the correspondent bank,
with a request to present these document to the buyer for payment, indicating when and on what
conditions these documents can be released to the buyer. The correspondent/collecting bank invites
their client, the buyer, to come to the bank and inspect the documents (4).