A Submission on “Improving Australia’s Law and Justice
Framework – A Discussion Paper to explore the scope of
reforming Australian Contract Law”
Martin Doris∗
Introduction
1. In Improving Australia’s Law and Justice Framework – a discussion paper to
explore the scope for reforming Australian contract law,1 the AttorneyGeneral’s Department has neatly summarised and briefly addressed many of
the perceived difficulties facing consumers and businesses when contracting
both domestically and cross border, including in online markets. The
Government takes the view that as the economy emerges from the global
financial crisis it is an opportune moment to reflect on ways to reduce
transaction costs for business, bolster consumer confidence and generally
enhance the international standing of domestic contract laws. It is therefore
seeking the views of stakeholders on the merits of action, legislative or
otherwise, and on the possible costs and benefits of ‘internationalising’ the
law. The Attorney-General’s Department is particularly keen to receive data
on the primary problems experienced by users of contract law in practice.
Advice is also sought on how best to tackle any identified problem areas.
2. This emphasis on the need to identify specific problems experienced by
stakeholders is reassuring and empirical data ought reasonably to guide the
reform process going forward. That said, the discussion paper does highlight
concerns with the wider accessibility and overall coherence of the law and this
may in time prompt a more emboldened law reform strategy.
3. At the outset it is therefore important to stress that complexity is a feature of
all modern private laws systems, and many of the difficulties encountered in
practice typically arise at the intersection between contract, tort and property
law. As European regulators discovered early on in seeking to promote
‘coherence’ in the field of contract law in the European Union, it is difficult to
engage with ambiguities and inconsistencies in the law of contract without
trespassing into other core sub-fields of private law. It is precisely in these
areas of intersection where neat classifications, and the black letter rules that
are to be found in textbooks on contract law, grate with the law-in-action. This
is, of course, not a legitimate reason for the Government not to intervene in
improving areas of private law, including with the laudable goal of making
specific provisions and/or the law generally more accessible and user-friendly,
however the Attorney-General’s Department appears to be particularly
concerned that the law is at times to be found in ‘unexpected places’. The
Assistant Professor, Faculty of Law, Chinese University of Hong Kong.
‘Improving Australia’s Law and Justice Framework – a discussion paper to explore the scope for
reforming Australian contract law’, March 22, 2012. Currently accessible at:
http://www.ag.gov.au/Consultationsreformsandreviews/Pages/Review-of-Australian-ContractLaw.aspx (last visited, 6 June 2012).
∗
1
1 consultation paper argues that this could make the discovery of contract rules
more onerous for ‘non-experts’, and cites the rules governing the assignment
of contractual rights as an example. 2 The Government, for example, discusses
the fact that these rules may be set out either in a ‘Property Law Act, a
Conveyancing Act or equivalent’ depending upon the individual State or
Territory concerned, and that as a result ‘it may be difficult for non-experts to
find all the statutory rules relevant to their case’.3 Yet short of blanket
uniformity through a single nationwide statute it is difficult to perceive how to
remove such divergences. Moreover, before contemplating any action in order
to resolve what would appear to be stylistic variations it would be appropriate
to assess just how frequently ‘non-experts’ in the law do in practice seek to
access such rules. Equally, and perhaps most crucially, although these
contractual provisions are contained in legislation with differing titles, it is
unclear from the Government’s consultation paper whether in practice there
are any significant differences in the content of the contract rules themselves.
4. This is perhaps one useful illustration that many of the perceived difficulties
that seemingly arise through the operation of the domestic law of contract may
in fact prove more theoretical than actual. However, the Government is
similarly concerned that the courts all too readily resort to equitable principles
when resolving contractual disputes and/or fall back on general clauses such
as good faith. In the view of the Attorney-General’s Department, if a matter is
subject to litigation, parties are as a result, ‘often unlikely to be able to predict
the outcome [of a dispute arising] under contract’.4 Moreover, a general ‘lack
of clarity in several areas’, it is suggested, ‘may mean that businesses and
other organisations are left to engage in a substantial amount of guesswork’.5
Unfortunately these ‘several areas’ are not adequately identified in the
Government’s discussion paper.
5. Nonetheless, there can be few who would disagree that many features of the
general law of contract could be better articulated and that the continued
development of the law of contract through the courts does to an extent reduce
its accessibility for users, particularly for overseas traders who may be
dissuaded from offering goods and services to domestic consumers and/or
from pursuing commercial opportunities with Australian businesses as a
consequence. Indeed, foreign traders may currently be reluctant to seek legal
advice on their rights and liabilities under domestic contract laws and may in
practice judge that the search costs involved simply outweigh the benefits. In
like measure, domestic consumers do often experience difficulties in
determining their legal rights, particularly in areas of the law that are typically
neglected by governments and regulators. Residential tenancy contracts, for
example, and the law of tenancy generally rarely receive much political
consideration by legislators despite the significant impact of the law on
2
Ibid at para. 3.6.
Ibid.
4
The impact of equitable principles is referenced in the discussion paper as a general concern. The
Attorney-General’s Department also observes that, “the interrelationship between common law
rules, equitable doctrines and statute means that it is difficult to draw boundary lines around
contract law”, n 1 above, at para. 3.4.
5
See Introductory comment on ‘Challenges for Australian Contracting’, n 1 above, at section 3.
3
2 citizens in their day-to-day life, and the coherence and/or accessibility of the
law is rarely a political concern. At an early stage in the European coherence
initiative, tenancy contracts were judged to be beyond the scope of the
Commission’s reform agenda, given its focus on the proper functioning of the
Union’s internal market.6 However, residential tenants do frequently
experience difficulties both in understanding their legal rights and in
determining how best to resolve disputes in practice.7 Much more could
doubtless be done therefore to educate tenants, consumers and small traders
on how best to seek practical remedies in the event of specific contractual
disputes. For consumers and small traders there would appear to be a
particular knowledge-deficit when faced with a legal dispute involving a
trader based outside Australia.8 However, the accessibility of the general law
of contract is of only limited practical benefit for individual consumers,
particularly for those with no legal training.
6. Indeed, as this author has argued previously, the general coherence of the law
of contract can be overly prized.9 This is particularly the case in relation to
commercial contract law and the English law of contract, for example, is not
renowned for its ready accessibility. In the modern digital age there is, for
instance, no downloadable app providing users with a ready template of
English contract laws. Nor are national contract laws as readily accessible as
existing soft law instruments such as the Principles of European Contract Law
(PECL) and the UNIDROIT Principles of International Commercial Contracts
(UPICC) and yet both soft law instruments have failed to supplant the
dominant position of English and New York laws in international trade.10
6
See however C. Schmid et al, ‘Tenancy Law and Procedure in the European Union’, Electronic
Publications of the EUI European Private Law Forum (Florence). Currently accessible at:
http://www.eui.eu/DepartmentsAndCentres/Law/ResearchAndTeaching/ResearchThemes/Project
TenancyLaw.aspx (last visited, 6 June 2012).
7
Moreover, in addition to the general legal complexity involved, aggrieved parties in certain cases
have no option but to seek to resolve disputes before the courts. See, for example:
http://www.lawfoundation.net.au/report/older/FCC649FB42881BD6CA257081001ED439.html
(last visited, 6 June 2012).
8
The Competition and Consumer Council has to date played a key role in advertising the rights of
consumers and highlighting in particular the contractual remedies available to consumers. See, for
example: http://www.accc.gov.au/content/index.phtml/tag/ConsumerRightsAndShopping/ (last
visited, 5 June 2012).
9
See, generally, M. Doris, Dispute Avoidance and European Contract Law (Europa Law
Publishing, 2008).
10
O. Lando and H. Beale (eds), Principles of European Contract Law, Parts I and II (Kluwer,
1999) and O. Lando et al, Principles of European Contract Law, Part III (Kluwer, 2003). Parts I
and II of the PECL provide annotated rules on a range of general contract law issues including the
formation, interpretation and performance of contracts, and remedies for non-performance. The
later Part III was published in 2003, and similar to the DCFR, covers broader issues such as
assignment, plurality of debtors and creditors, set-off, prescription, etc. The twin volume
UNIDROIT Principles of International Commercial Contracts (1994, 2010) were prepared under
the auspices of the International Institute for the Unification of Private Law in Rome. For a recent
discussion of the limited impact of the UPICC in the UK in particular, see S. Lake, ‘An Empirical
Study of the UNIDROIT Principles – International and British Responses’ (2011) 16(3) Unif L
Rev 669. (Lake highlights a strong opposition among members of the Bar in London toward the
UPICC, and cites one commercial barrister who observed that it would be “an important
professional fault to advise a party to use the [UNIDROIT Principles]”, at 689. Of course,
Australian contract law has already departed from the English law in a number of substantive areas
3 7. The consultation paper identifies the English law of contract as the law of
choice in international commercial contracts.11 Despite the high cost of
litigation, various factors help to explain why parties to international business
contracts commonly seek to resolve their disputes before English courts and
provide for English law as the governing law of their contracts. The reputation
and expertise of the English judiciary, the common law method, and perhaps
most crucially the strategic advantages of resolving commercial disputes in
the City of London are frequently cited as key drivers.12 In addition, it is likely
that parties put much faith in a tried and tested body of contract laws that are
not only commercially oriented but that are set within a wider, overarching
and reasonably predictable legal framework. Of course, path-dependency also
plays a significant role in that parties that choose the English law of contract
and refer their disputes to the English courts tend to be large, risk adverse
commercial parties who are generally unwilling to consider alternative laws
and venues for dispute resolution without a sound justification.13
8. The dominant position of the English law of contract in international
commercial contracts, and its wider impact on the development of global
dispute resolution, is therefore highly relevant for the current domestic debate
as it is clearly artificial to attempt to disconnect substantive contract law
reform from the need to understand how contract disputes are resolved in
practice. Indeed, as Murray Deakin, a partner at Middletons, notes, ‘[t]he
number of cases involving contract law reaching the High Court [of Australia]
is less than 5 per cent and that doesn’t suggest a problem’.14 That said,
contractual disputes in common law jurisdictions tend to be ‘low visibility’
and there is a richer literature in the US, for example, on the types of repeat
players that engage in contract litigation, the typical winners and losers at
and there may be a strategic, economic advantage to be gained from aligning the domestic law
with that slowly emerging in the EU. Indeed, Justice Douglas would appear to believe that
Australian contract law has already arrived at something of a crossroads, still heavily influenced
by the English law but increasingly taking note of wider developments in Brussels, see, J.
Douglas, ‘England as a source of Australian law: For how long?’ (2012) 86 ALJ 333.
11
n 1 above, at para. 4.14.
12
See, for example, ‘London leads the world in commercial law cases’, The Guardian, January 2,
2012. Figures suggest that 9 in every 10 commercial disputes resolved in London have an
international link. As Gregory notes, “English law has a lengthy provenance. It contains guidance
on most conceivable areas and is based on the fundamental principle of freedom of contract, which
is attractive to parties from jurisdictions that take a more interventionist and paternalistic
approach. The English common law has been exported throughout the world and parties therefore
tend
to
be
familiar
with
its
underlying
principles.”
See:
https://www.lawgazette.co.uk/features/hopes-cement-international-disputes-uk (last visited, 6 June
2012). Moreover, a previous Gap Gemini report, published in 2001, estimated that annual invisible
earnings for legal services in the City of London amounted to £800 million. See:
http://ec.europa.eu/consumers/cons_int/safe_shop/fair_bus_pract/cont_law/comments/4.14.pdf
(last visited, 6 June 2012). In the context of the current reform process it would doubtless be
advantageous to conduct a similar study in order to determine the current economic return of the
Australian legal services sector.
13
For a useful discussion of path-dependency in relation to the UN Convention on Contracts for
the International Sale of Goods (CISG) 1980, see L. Spagnolo, ‘Green Eggs and Ham: The CISG,
Path Dependence and the Behavioural Economics of Lawyers’ Choice of Law in International
Sales Contracts (2010) 6 J Private Intl L 417.
14
See G. Dent, ‘Easy does it’, brw.com, April-May, 2012
4 trial, and the number of contractual disputes that settle out of court.15 As part
of the current reform process it would therefore greatly assist to have a much
more accurate picture of the current state of the law in practice, and a better
appreciation of the specific needs of stakeholders. In turn, data on the volume
and type of contract disputes most typically litigated domestically, or referred
to arbitration, would provide a clearer picture of the real law-in-action. An
accurate analysis of any emerging data may, going forward, further assist
courts and arbitrators to attract a greater share of the ‘market’ for international
dispute resolution. It may also indicate the types of difficulties most
commonly experienced by consumers, both in domestic and cross-border
contracts, and allow thereafter for targeted solutions.16
II.
Avoiding the ‘temptation towards elegance’ and blanket assumptions
as to the merits of new contract law rules
9. In the absence of reliable supporting data, it would therefore be advisable for
the Attorney-General’s Department to adopt a minimalist attitude to contract
law reform. The Government should further carefully reflect on the perceived
merits of new (soft law) contract rules, particularly those targeted at purely
commercial, business-to-business (B2B) contracts. Above all, the Government
must be careful to avoid what Smits has termed ‘the temptation towards
elegance’ in private law.17 Elegant ‘solutions’ in the form of new Australian
contract rules – including new codified rules and general principles, or rules
imported on the basis of overseas ‘best practice’ – should be approached with
a good degree of caution.
10. Equally critical, the reform process must not become unduly ‘academic’, nor
indeed should any specific stakeholder group dominate the reform agenda, and
in this regard it is important to bear closely in mind the recent European
experience.
A.
Key lessons from the EU coherence initiative
15
M. Galanter, ‘Contract in Court, or Almost Everything You May or May Not Want to Know
About Contract Litigation’ (2001) 3 Wisc Law Rev 577.
16
It will clearly remain an uphill struggle for domestic courts and the arbitration community to
compete with leading Asian ‘hubs’ for commercial dispute resolution, such as Singapore and
Hong Kong. Yet internationally Australia also currently lags behind other jurisdictions when it
comes to exploring the potential use of online dispute resolution (ODR) in both commercial and
consumer markets. The gap is particularly apparent when we compare domestic developments to
those taking shape in the EU in favour of consumers. A number of jurisdictions, most notably the
Netherlands and Belgium, have developed sophisticated consumer ODR platforms. Belmed.be is
one notable public-private partnership involving the Belgian government. It assists consumers and
small traders in resolving domestic disputes in the energy, travel, financial services and building
sectors, and in tackling cross border disputes. The European Commission has further proposed a
Regulation on online dispute regulation, which aims to provide a single EU wide ODR platform
for the resolution of cross border disputes. The current draft Regulation is currently accessible at:
http://ec.europa.eu/consumers/redress_cons/docs/odr_regulation_en.pdf (last visited, 6 June 2012).
The proposal aims to ensure that European consumers will be able to resolve low value disputes
online within 30 days.
17
J. Smits, ‘The Future of European Contract Law: on Diversity and the Temptation of Elegance’,
available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=803144 (last visited, 1 June
2012).
5 11. It is perhaps unsurprising that the pursuit of a more coherent, uniform contract
law for Europe’s internal market has to date proved both politically sensitive
and controversial from a purely legal perspective. As this author has
emphasised previously, ‘coherence’ in the law of contract, and private law
generally, is not easily benchmarked18 and recent concrete initiatives at the
EU level, including the compilation of the Draft Common Frame of Reference
on European Contract Law (DCFR) and the more recent proposal for an
optional instrument on a common European sales law (CESL), have rightly
generated much adverse commentary, particularly from law-and-economics
scholars.19 Both the DCFR and CESL have similarly prompted a noticeably
lukewarm reaction from the wider European business community. Indeed the
case for a new optional sales law, for example, is premised upon broad
assumptions – concerning the perceived needs of businesses, consumer
attitudes and behaviour, and the merits of optional contract law rules – that
rest on weak foundations.
12. It will be recalled that in 2001, the European Commission kick-started a major
consultation on the need to reform European contract law. Perhaps
unsurprisingly, the Commission’s Green Paper, which was addressed to the
European Parliament and Council and invited views from all relevant
stakeholders, raised many of the very same issues identified in the AttorneyGeneral’s recent discussion paper.20 Of course, it should not be forgotten that
the European initiative is principally a ‘market-building’ exercise with an
emphasis on the need to remove obstacles for the proper functioning of the
internal market. Moreover, ‘EU contract law’ remains a concept, not as yet a
reality. In the interests of streamlining the internal market and encouraging
cross border trade, much of the focus of the European institutions has been on
assessing the extent to which variations between national contract laws
discourage cross border transactions. For this reason, and in part due to
competence issues facing the EU, variations in contract laws have typically
been presented by the Commission and proponents of a European civil code as
18
See n 9 above, at 63-108.
See, respectively, C. von Bar and E. Clive, Principles, Definitions and Model Rules of Private
Law, Draft Common Frame of Reference (DCFR), Vols. I-IV (Oxford University Press/Sellier
2010) and the ‘Proposal for a Regulation of the European Parliament and of the Council on a
Common European Sales Law’, COM (2011) 635 final, Brussels, 11.10.2011 (hereinafter DCFR
and CESL). The Proposal consists of three main parts: a Regulation, Annex I to the Regulation
containing the contract law rules (the CESL) and Annex II containing a Standard Information
Notice. Despite the title of the draft Regulation, article 3 CESL indicates that it aims to cover not
only sales contracts but also contracts for the supply of digital content and contracts for the supply
of related services. The author is not aware of any comparative analysis of the draft CESL and
comparable Australian (consumer) contract laws. Such a study would nonetheless be constructive
in the context of the current reform agenda. Importantly, the Principles of European Contract Law
form the bedrock of the DCFR, whilst the UNIDROIT Principles and the UN Sales Convention
further served as templates for the content of both the DCFR and CESL. Vogenauer appears to
view the DCFR in a negative light for having added unnecessarily to the existing international
legal landscape which is in many respects already littered with soft law instruments, see S.
Vogenauer, ‘Common Frame of Reference and UNIDROIT Principles of International
Commercial Contracts: Coexistence, Competition or Overkill of Soft Law?’ (2010) 6(2) Eur Rev
Contract L 143.
20
See Communication from the Commission to the Council and the European Parliament on
European Contract Law, COM (2001) 398 final, 11.07.2001.
19
6 a de facto impediment to trade. Yet this economic argument in favour of a
uniform set of contract rules is increasingly strained. Certainly studies have
suggested that business transaction costs are higher as a result of divergences
between the contract laws applicable across EU Member States, and that some
consumers may be losing out as a result through a reduced access to specific
goods and services, yet the idea that blanket substantive law uniformity in
private law is the solution remains heavily contested.21
13. What therefore, if anything, should be done domestically in Australia in order
to encourage cross-border contracting in the Asia-Pacific region, for example?
Unlike the discussion paper, which is largely silent on how to deal with the
absence of an Asian contract law, for example, the Commission’s 2001 Green
Paper offered stakeholders four concrete proposals to deal with divergences
across European national legal systems, which included:
(i)
A market solution, which admittedly was unrealistic. The Commission did
nonetheless suggest the option of refraining from any action to allow any
perceived problems to be resolved by the market;
(ii)
The development of non-binding common contract law principles, which
could be used by contracting parties when preparing and drafting contracts, by
national courts and arbitrators, and by national legislators when drawing up
legislative proposals;
(iii)
A review of EU legislation in the area of contract law; and most
controversially,
(iv)
The adoption of a new instrument at EC level.
14. The 2001 Communication resulted in a follow up Action Plan in 2003 with the
Commission proposing a mix of non-regulatory and regulatory measures.22
The Commission refused to rule out the possibility of further sector-specific
interventions in matters of private law, which was for long the subject of bitter
academic criticism. Such piecemeal, or ‘pointillistic’, lawmaking at Union
level was often criticised for disturbing the overall coherence of Member
States’ national contract laws.23 In some EU jurisdictions, sector specific
21
The Commission is firmly persuaded that consumers are losing out as a result of legal
fragmentation and that consumers seeking to take advantage of better deals in other Member
States are often refused sale or delivery by traders, see V. Reding, ‘The Optional Common
European Sales Law – Seizing the Opportunity’ (European contract law conference, Warsaw,
November 2011) (noting too that only 7% of online shoppers purchase cross border). For
additional data on impediments experienced by some EU consumers when seeking to access
consumer goods and services that are available in other Member States, see ‘Consumer Protection
in the internal market’, Special Eurobarometer Survey 298, 2008. From the reliable data gathered,
the survey suggest that 1 in 10 cross-border shoppers have experienced difficulties because they
reside ‘in a different jurisdiction from where the purchase took place’, at p.8. The study is less
clear however on the types of problems encountered.
22
Communication from the Commission to the Council and the European Parliament on to the
Action Plan on a More Coherent European Contract Law, COM (2003) 68 final, 12.02.2003.
23
For an earlier discussion of various difficulties encountered by civil law systems as a result of
EC secondary legislation in the field of private law, see W.H. Roth, ‘Transposing ‘pointillist’ EC
guidelines into systematic national codes – Problems and consequences’ (2002) 10 Eur Rev
Private L 761.
7 lawmaking was further frequently criticised for lowering national standards of
consumer protection or for introducing new rules that were considered inferior
to those previously available under national laws, and/or for introducing novel
provisions that were considered defective. Aware therefore of the limitations
of continued sector-specific lawmaking the Commission rightly acknowledged
that measures were needed to improve and simplify the burgeoning aquis
communautaire in the area of contract law and to improve legislative
strategies generally. The Action Plan further sought to promote the elaboration
of EU-wide standard contract terms and conditions and more cryptically
suggested the need to explore further the need for an ‘optional instrument’ on
European contract law.
15. Following initial consultations with stakeholders, the European Commission
seized on the stakeholder responses calling for a streamlining of the acquis
communautaire and commissioned work to proceed on what was obliquely
termed a ‘Common Frame of Reference’ (CFR). This CFR was to be a
‘toolkit’ that would assist European legislators when preparing future
legislation impacting on European private law.24 It was further accepted that
the process of compiling the Common Frame would require drafting input
from a consortium of European academics and other stakeholders.25 It was
understood that the CFR would serve to assist legislators in particular when
drafting future private law legislation, particularly EU consumer laws.
However, in terms of its design, the European institutions appear to have
followed a path of least resistance in allowing for a comprehensive academic
research project. Early on it would appear that the EU institutions took the
view that encouraging this selected group of contributors to progress work on
the ‘academic’ DCFR would in the first instance reduce the high level of
discontent expressed toward European legislators by primarily civil lawyers.
16. As a consequence, the EU reform strategy, which has resulted thus far in both
the DCFR and the proposed optional instrument CESL, is currently
backfiring. Regrettably, instead of adopting specific, targeted reforms based
on sound empirical analysis, and tailoring solutions to identifiable problems
on the market, the project has to date produced two inadequate soft law
instruments. As is discussed below, the CESL in particular appears unlikely to
prove attractive for European businesses, whilst a significant body of opinion
considers the academic DCFR – which built heavily upon the Principles of
European Contract Law (PECL) – to be broadly defective.
17. Much energy has been expended in the pursuit of abstract, generalised
principles of European private law, in addition to new agreed definitions of
primary legal terms and model contract rules, yet leading commentators argue
24
See R. Madelin, ‘European Contract Law: The Way Forward’ (December 2004), available at:
http://ec.europa.eu/consumers/cons_int/safe_shop/fair_bus_pract/cont_law/speaking_note_madeli
n_en.pdf (last visited, 6 June 2012). (noting that the CFR would serve as a ‘toolkit’ and would, in
particular, contribute to the goal of improving regulation and the simplification of EU legislation).
25
The umbrella “Network of Excellence”, or ‘Joint Network on European Private Law (coPECL)’
was founded in 2005 under the European Union’s Sixth Framework Programme in order to deliver
the Common Frame of Reference on European Law ‘in the form of definitions, general concepts
and legal rules’ with supplementary comments and ‘evaluative analysis’. For further details, see:
http://www.copecl.org/ (last visited, 1 June 2012).
8 that if it were ever to be implemented into law the DCFR would significantly
reduce party autonomy and would generate much unnecessary litigation. As
Eidenmüller, Faust, Grigoleit, Jansen, Wagner and Zimmermann have
observed it would create the conditions for ‘a massive expansion of
uncontrolled judicial power’ for ‘[the academic DCFR] suffers from a great
number of serious shortcomings’, including ‘unresolved or unconvincing
policy decisions as much as ill-adjusted and inconsistent sets of rules’.26 The
provisions of the DCFR are also seen as a significant body blow to party
autonomy and are let down by an unrestrained reliance upon general clauses.27
The concept of good faith and fair dealing, in particular, occupies an unduly
dominant position within the DCFR and indeed within the CESL, both as a
standard for contracting behaviour and as a tool for contractual interpretation.
This is very much in keeping with trends in soft law instruments such as
PECL and the UNIDROIT Principles however the fear must remain that it
would create unnecessary confusion and introduce a novel, unpredictable
layer of private law that would in the first instance increase business
transaction costs. As currently drafted the CESL also marks a significant
rupture with current business practice across a range of specific sectors of the
European economy. An added unknown is how, beyond B2C contracts,
sweeping general clauses in CESL, such as good faith and fair dealing, would
operate within common law systems, particularly in relation to commercial
contracts. In like measure, the concept of ‘reasonableness’ is readily invoked
by the drafters of the DCFR in some areas, whilst notably absent in other
critical fields. It has been pointed out that the terms ‘reasonable’ or ‘fair and
reasonable’ appear to be ‘the solution to every conceivable problem’, and that
these terms are used on over four hundred occasions in the DCFR.28 Indeed
the drafting decisions around the term ‘reasonableness’ have been rather
provocatively queried:
‘some [DCFR] rules incorporate the notion of reasonableness and others
do not, it would seem to follow that unreasonable interpretations are
allowed where the term does not appear – an odd outcome indeed. Yet if
one is not justified in reaching this conclusion, what is then accomplished
by including the term reasonable?’29
26
H. Eidenmüller et al, ‘The Common Frame of Reference for European Private Law – Policy
Choices and Codification Problems’ (2008) 28(4) Ox J Leg Stud 659, at 707. The authors consider
the DCFR to be lacking in clear core aims and values, and that the ‘abundance of general
provisions and open-ended legal concepts’ would herald a ‘massive expansion of uncontrolled
judicial power,’ at 707. They further note that the balance of the DCFR is out of sync with
reasonable commercial expectations and emphasise the fact that ‘the responsibility for the content
of a contract is shifted from the parties towards the law and the judiciary’, at 707. They warn that
if implemented it would result in ‘unbounded liability’ and the authors raise a ‘floodgates’
argument that they consider to be fully justified, at 686.
27
Moreover, many of the same general clauses are considered to be further ‘replete with
indeterminate terminology’, ibid at 687. For an additional detailed analysis of the DCFR from a
primarily common law perspective, see S. Whittaker, ‘The ‘Draft Common Frame of Reference’:
An Assessment’, a report prepared on behalf of the UK Ministry of Justice (London, 2009).
28
See H. Eidenmuller et al, n 26 above, at 70.
29
n 26 above, at 675. It should in like measure be recalled that a number of past projects of the
American Law Institute and the National Conference of Commissioners on Uniform States Laws
have similarly been heavily criticized for an unrestrained resort to the concept of ‘reasonableness’.
9 17. The DCFR, as compiled principally by the academic study groups involved, is
therefore perceived to be at once both overly technical and heavily detailed in
a number of areas whilst also managing to be noticeably incomplete in other
key sub-fields, thus creating unnecessary ambiguities and increasing, rather
than reducing, legal uncertainty.30 Of course a detailed analysis of the
institutional design process adopted at the European level and its impact upon
the choice of specific private law rules is beyond the scope of this submission,
however it clearly deserves much closer analysis, including by domestic
lawyers, policymakers and the Attorney-General’s Department. More
narrowly, on the basis of its limited impact in practice to date and the reaction
of the European business community, it would be tempting to presume that the
DCFR will be used solely by academics as a research tool. Yet there is a very
strong possibility that it will continue to influence private law developments at
the EU level and many of its provisions may indeed enter legislation via ‘the
back door’ and appear in future legislative proposals, as is the case with
CESL.
18. The DCFR process would therefore appear to be a suitable example of how
not to advance any would be domestic law reform programme in the area of
contract law. In addition to the perceived risks for contracting parties that a
similar instrument would introduce, the DCFR is in reality a tool that is of
very limited practical use for legislators. Indeed it is difficult to conceive of an
instrument less like a ‘toolkit’ for lawmakers.31 Faithful to the views of many
of its drafters, the DCFR is in effect the first draft of a pan-European code of
private law. It ventures far beyond issues of general contract law and deals
instead with select aspects of tort, property law, trusts, unjust enrichment, etc.
As such, it functions as an ‘academic’ code, and it will doubtless serve the
profession well in teaching comparative private law, yet much like the
optional sales law instrument, it was rushed to market with undue haste and
following inadequate reflection. This despite the fact that, as will be discussed
below, both the DCFR and CESL are currently ripe for the lecture hall, not for
the world of commercial deal making, nor careful contract drafting and
planning.
This was a criticism of the stunted reforms of UCC Article 2B and the broad collapse of the
Uniform Computer Information Transactions Act (UCITA).
30
For criticism of the extent to which the process has been ‘academic’ driven to the exclusion of
legal practitioners, see, for instance: The Law Society of England and Wales, ‘Response to
Commission Green Paper on policy options for progress towards a European Contract Law for
consumers and businesses’ (January 2011) (noting that ‘[t]he Society is concerned that the group
of experts convened by the European Commission is mainly comprised of academics and would
welcome the direct involvement of common law practitioners in the drafting process”, at 4) The
Response
is
currently
accessible
at:
http://ec.europa.eu/justice/news/consulting_public/0052/contributions/223_en.pdf (last visited, 6
June 2012).
31
Indeed the full edition of the DCFR is currently advertised as a ‘six volume opus’ on European
private law and it is significant that initial dissatisfaction with the content of the DCFR resulted in
a further round of review in 2010, which was carried out by a selected group of experts on behalf
of the Commission. This resulted in 2011 in a feasibility study that produced a reduced set of 189
articles comprising ‘core contract law principles’ considered ‘fundamental to contractual
relationships in the internal market’. For further details on the Feasibility Study, and the 106
responses
that
it
generated
from
various
stakeholders,
see:
http://ec.europa.eu/justice/contract/expert-group/index_en.htm (last visited, 6 June 2012).
10 B.
Avoiding blanket assumptions
19. The EU coherence strategy has largely been premised upon a number of broad
assumptions about markets and market participants. In particular, the EU
institutions appear to hold a fixed view that harmonised laws and ‘level
playing fields’ are in the best interest of business and consumers alike. Indeed
as Epstein observes, ‘blanket assertions of the superiority of harmonization’
have characterised the work of the academics most directly involved, and this
has impacted negatively upon the quality of the current reform proposals.32
Certainly the Commission, in particular, has been persuaded that:
“Differences in contract law between Member States hinder traders and
consumers who want to engage in cross-border trade within the internal
market. The obstacles which stem from these differences dissuade traders,
small and medium sized enterprises (SMEs) in particular, from entering
cross border trade or expanding to new Member States’ markets.
Consumers are hindered from accessing products offered by traders in
other Member States.”33
20. Yet differentiated markets, particularly for consumer goods, and alternative
options on consumer rights and remedies may in practice result in lower costs
and greater contractual freedom for consumers. As is clear, consumers across
the European Union frequently opt for cheaper flights on low-cost airlines, for
instance, fully aware that many of their non-legal entitlements may be greatly
reduced as a result.34 They do so equally aware that their experience may be
much less pleasant should their travel arrangements not go to plan. In like
measure, the ‘one-size-fits-all’ approach to consumer rights and remedies is
therefore questionable both in domestic markets and particularly for cross
border contracts where indeed traders may legitimately experience greater
practical difficulties in guaranteeing identical goods and/or services to those
currently available in other markets. Uniform private law rights and remedies
can therefore serve as a straightjacket, unfavourably impacting upon those
very same SMEs who are currently being encouraged to expand into new
markets. In practice, as the European institutions are aware, SMEs operating
cross-border in the internal market often simply target specific jurisdictions
and tailor their contracts accordingly. Studies further reveal that variations in
tax across Member States, concerns about possible corruption and/or
inappropriate business practices, added to language and cultural differences
are frequently more significant obstacles to cross border trade than divergent
32
See R.A. Epstein, ‘Harmonization, Heterogeneity and Regulation: Why the Common European
Sales Law Should Be Scrapped’, (European Contract Law: A Law-and-Economics Perspective
conference, Chicago, April 2012), at 5.
33
See ‘Proposal for a Regulation of the European Parliament and of the Council on a Common
European Sales Law’, n 19 above, at 2 (of the ‘Explanatory Memorandum’). The Commission
suggests that ‘the value of the trade foregone each year between Member States due to differences
in contract law alone amounts to tens of billions of Euros’, at 3 (of the ‘Explanatory
Memorandum’)
34
See also in this regard: http://www.law.ed.ac.uk/epln/blogentry.aspx?blogentryref=8912 (last
visited, 6 June 2012) and J.J. Ganuza and F. Gomez, ‘Optional Law for Firms and Consumers: An
Economic Analysis of Opting into the Common European Sales Law’, (European Contract Law: A
Law-and-Economics Perspective conference, Chicago, April 2012).
11 contract rules.35 For this reason, the psychological barriers to cross border
trade may be as problematic, if not more so, than existing variations in private
law rules.
21. Similarly there is little convincing evidence that consumers are significantly
dissuaded from entering into cross border contracts as a result of differences
between national contract laws. A 2011 Ipsos/MORI study conducted across
six European countries did report that 46% of consumers polled indicated that
they would be more inclined to enter into online cross border contracts if there
was a new uniform EU wide contract law. In the same study, however, 43% of
those surveyed stated that a new EU wide contract law would make no
difference to their online shopping habits.36 As is readily acknowledged,
consumers frequently fail to read the very terms and conditions of specific
contracts, particularly online contracts. It therefore seems highly doubtful that
consumer confidence in Australia would be significantly enhanced by reforms
introduced into domestic law aimed at reducing variations in the laws
governing cross border consumer contracts. Indeed the primary concern of
European consumers when purchasing online concerned not divergent
contract laws but the security of online payment methods.
22. Whilst there is, as Posner notes, arguably a certain ‘branding’ advantage in a
uniform law targeted at consumers, as they may be more readily inclined to
enter into cross-border transactions if reassured about their rights, this is
unlikely to reap significant rewards.37 Instinctively it could be argued that,
under an optional CESL contract, for example, consumer confidence would
gradually increase if it were to be made clear to consumers that specific B2C
contracts governed by CESL would guarantee their European consumer rights.
Of course, to that end, it would be necessary to widely advertise and promote
the specific consumer-friendly features of the optional instrument. It is equally
possible to envisage creative ways that such contracts for goods and services,
governed by a future CESL, could be readily identified by consumers,
particularly when online shopping. Yet such a glossy picture appears
unconvincing due to the optional nature of the instrument. As Posner warns,
‘everything we know about consumer ignorance, and consumers’ inability and
unwillingness to read and understand contracts suggests that this assumption
is false. If it is false, then [the] availability of the CESL option will not
increase the number of cross-border transactions between consumers and
foreign sellers and sellers will not use the CESL in consumer transactions’.38
35
See S. Vogenauer and S. Weatherill, Harmonisation of European Contract Law: Implications
for European Private Laws, Business and Legal Practice (Hart Law Publishing, 2006).
36
The study assessed consumer behaviour and attitudes in France, Spain, Germany, Great Britain,
Italy and Poland. See Ipsos/MORI study, ‘Online consumer research’, January 2011. The study
was carried out on behalf of Allen & Overy LLP and is currently accessible at:
http://ec.europa.eu/justice/news/consulting_public/0052/contributions/6_en.pdf (last visited, 6
June 2012).
37
See E.A. Posner, ‘The Questionable Basis of the Common European Sales Law: The Role of an
Optional Instrument in Jurisdictional Competition’, (European Contract Law: A Law-andEconomics Perspective conference, Chicago, April 2012). Similarly, for an insightful analysis of
consumer behaviour in relation to standard form contracts, including online contracts, see: O. BenShahar, ‘The Myth of the Opportunity to Read’ (2009) 5(1) Eur Rev Contract L 1.
38
Ibid. The author is not aware of any stress tests or other assessments, whether carried out on
12 Moreover, sellers would be unwise to opt into the current draft CESL, and
unlikely to do so if it is considered to be notably pro-consumer when tested
against alternative domestic contract rules already available on the market. In
the crucial short-to-medium term the domestic rules are also likely to be
considered much more predictable than the CESL from a purely legal
standpoint.
23. Alarmingly, just as the EU institutions appear to have misconstrued the
preferences of businesses operating cross-border in the internal market, the
Commission in particular, would appear to have overestimated the degree of
time and interest that stakeholders in business and industry would be willing
to devote to law reform strategies in the field of contract law. The
Commission appears to have struggled to generate business interest in its
initiative since the 2003 Action Plan. The proposal for dedicated work on EU
standard terms and conditions is a notable example. It will be recalled that
under the Action Plan it was suggested that the Commission would host a
website to allow commercial enterprises to share information regarding
standard form contract terms. It was envisaged too that through such an
information exchange, commercial enterprises would be better able to identify
the types of standard form clauses in regular use across the EU and in specific
national Member States. It was also suggested that the website would help
identify ‘best practices’ in specific sectors. Whilst perhaps a laudable goal in
seeking to reduce the need for regulation at the EU level, this proposal
revealed a critical lack of awareness of business interests. Indeed the Action
Plan rather unconvincingly identified only one EU trade association,
‘Orgalime’, in relation to its proposal.39 This displayed not only an apparent
lack of interest in the work undertaken by other relevant trade associations but
the Commission further overlooked the already well-established and
prominent role played by bodies such as the International Chamber of
Commerce (ICC) in Paris.
24. As was highlighted at the time, commercial standard form contracts represent
a key commercial resource for companies and it would appear that in-house
lawyers, and other stakeholders in business and industry, were reluctant to
meaningfully engage with the proposal. More alarmingly, it would appear that
this general lack of engagement resulted in negative spill over effects on the
wider coherence initiative. Certainly the EU project has been fundamentally
an academic rather than a practice-oriented project from the outset, yet the
quest for common, abstract principles of European private law has resulted in
inadequate attention being devoted to trade practices. As Bernstein
emphasises, for example, the drafters of the Common European Sales Law
have:
behalf of the European institutions or other bodies, designed to test whether European lawyers
would currently recommend the draft CESL to their clients. The Law Society of England and
Wales has previously indicated that it would oppose an ‘optional instrument’ on European contract
law on the ground that the ‘need’ for such an instrument has not been demonstrated, n 30 above, at
3. The submission of the Law Society further suggests that English lawyers would be reluctant to
recommend an ‘optional instrument’ to clients.
39
See Action Plan, n 22 above, at 22. ‘Orgalime’ issues guidelines and develops general
conditions and model rules for traders operating in the mechanical and electrical engineering
sector. See: http://www.orgalime.org (last visited, 1 June 2012).
13 ‘simply assumed that trade usages and commercial practices that are
known by traders both exist and extend across the relevant boundaries of
trade. In particular, the drafters of the CESL seem to have assumed that
these usages are likely to be relatively uniform across significant areas of
the [European] market or within industry sectors that are ripe for an
increase in [the] volume of cross border trade’.40
25. As is apparent therefore, the European Commission-led ‘coherence’ initiative
does provide a number of useful signposts for the Government but it also
indicates a series of hazard markers and dead ends that should reasonably be
avoided. The Action Plan’s proposal for work to proceed on the elaboration of
EU-wide general contract terms is perhaps the most significant dead end. Put
simply, the initiative has misfired. More generally, however, the ‘coherence’
project remains unduly politicised and has generated controversy as a result of
the institutional choices made. These design flaws have further seeped into
concrete proposals such as the optional EU sales law, and the resulting
negative consequences are clearly relevant for the development of the current
reform agenda, particularly with the Attorney-General’s Department
discussing openly the need for ‘optional rules’. Indeed, as is discussed below,
if implemented, the current draft CESL may significantly increase transaction
costs for businesses operating in the EU, particularly in the immediate shortto-medium term, simply as a result of its optional character.
III.
The modernisation of domestic [private] law and the scope of any new
reform initiative
26. In seeking to learn from the recent EU experience, it will therefore be
necessary to give careful consideration to the scope of any domestic reform
and the goals to be achieved. It should be recalled that the European
Commission had sought initially to limit the ‘coherence’ initiative solely to
the field of contract law yet this ultimately proved futile. Another means of
potentially limiting the scope of the project, perhaps with the aim of reducing
costs, could be to focus exclusively on those difficulties experienced by
parties to commercial contracts, given that the law governing consumer
contracts has reached a high degree of uniformity and was recently revised.41
One obvious drawback of ‘compartmentalising’ the reform strategy and
excluding consumers is that, although the law has been recently updated, the
practical application of the law may still require further consideration.
40
L Bernstein, ‘An (Un)Common Frame of Reference: An American Perspective on the
Jurisprudence of the CESL’, (European Contract Law: A Law-and-Economics Perspective
conference, Chicago, April 2012) (noting that the CESL provides that, in addition to the written
terms, any “usage which the traders have agreed should be applicable” as well as any “usage
which would be considered generally applicable by traders in the same situation as the parties”
[see Art. 67 CESL]. In addition, courts interpreting the CESL would be required to consider
practices that “grossly deviate” from “good commercial practice”. Given the sweeping nature of
these provisions, Bernstein argues that comparable provisions in the UN Sales Convention are
preferable to draft CESL). There are four specific references to ‘good commercial practice’ in
CESL (in relation to precontractual disclosure, fraud and unfair terms between traders and unfair
terms related to late payment).
41
Australian consumer law rules are now principally to be found within the Competition and
Consumer Law Act, 2010.
14 Similarly, it will be important not to overlook those SMEs and other small
traders who may require greater protection from larger commercial enterprises
in practice, and who may currently receive a lower standard of protection
under the domestic law in discrete sectors of the economy, or may simply be
unable to benefit from an adequate standard of protection through a lack of
bargaining power.
27. It is perhaps significant that the Attorney-General’s Department considers the
need to remove problematic inconsistencies and technicalities regardless of
the status of the contracting parties. The Department also appears keen to
explore how changes to contract rules may serve to promote greater cross
border trade. Certainly if the Government opts to focus on pure commercial
risk, and the potential loss of business opportunities for domestic companies,
it will likely identify a significant number of Australian companies,
particularly SMEs not privy to legal advice, that are currently dissuaded from
entering into cross-border contracts, particularly with potential trading
partners in the immediate Asia-Pacific region. Despite an apparent trend
towards regionalism in international trade, perhaps wisely there has been little
movement of significance towards a comprehensive pan-Asian private law.42
Yet similarly there has been little meaningful research conducted on the
impact of legal divergence in the region and what steps, if any, could be taken
to counter or minimise the possible negative impact of private law variations.
28. Divergence in contract laws may mean that in practice domestic SMEs are
dissuaded from entering into overseas markets. The law governing contractual
negotiations, for example, differs significantly between common and civil law
systems which is relevant for cross border contracting in the region, including
under international sales contracts governed by the UN Sales Convention.43
Though SMEs may be ignorant of the competing legal rules, they may
instinctively have genuine concerns that cross border contractual negotiations
could prove costly and time consuming and/or that they could be found to be
in breach of specific contractual obligations in a foreign court. Similarly,
parties to failed contractual negotiations may, for example, be found liable for
breach of precontractual obligations and the legal obligation to negotiate in
good faith is problematic in practice both domestically and cross border. For
this reason, it would be appropriate to consider in the first instance what may
be classified as ‘invisible’ risks in contract law.
29. Whereas parties can plan, albeit at a cost, for most eventualities through
careful contract drafting, cross border contractual negotiations can create such
‘invisible’ risks. Common law courts often appear ill equipped to resolve
disputes arising out of failed negotiations and in practice it can prove difficult
for commercial parties to contract around precontractual duties, particularly
42
In the late 1960s, there was a degree of Australian academic interest in the design of an Asian
contract law – see, for example, D. Allan, Asian Contract Law (Melbourne University Press, 1969)
and more recently a number of scholars, particularly in Japan, Taiwan and Singapore have been
promoting the Principles of Asian Contract Law (PACL), and have adopted the PECL as a key
inspiration and model.
43
L.A. Di Matteo, ‘CISG and the Presumption of Enforceability: Unintended Contractual Liability
in International Business Dealings’ (1997) Yale J Intl Law 111.
15 when operating cross-border. Also, whether before the courts or through
arbitration, disputes can prove costly, even under the English law, which
provides a clear steer that parties are free to negotiate at arms length.44 PostWalford v Miles, an agreement to negotiate in good faith or an agreement to
agree further agreements are both clearly unenforceable.45 The reason for such
unenforceability is equally clear. The English courts take the view that there
are no objective criteria by which a court can decide whether a party has acted
unreasonably and that a duty to negotiate in good faith is not only unworkable
but also inherently inconsistent with the position of a negotiating party.
Agreements to reach an agreement with a third party are also unenforceable
for the same reason.46 The current English position, though notably out of line
with international ‘best practice’, does provide much greater legal certainty for
parties ex ante and is seemingly much more economically efficient. That said,
as was noted recently in Charles Shaker c Vistajet Group Holding SA, ‘parties
still appear unclear that such commitments do not give rise to enforceable
obligations under English law’47 and the law has been frequently ‘restated’ by
the courts, revealing that such commitments are still the subject of relatively
frequent litigation.
30. Care is therefore needed in seeking to modernise and/or internationalise the
law in this field, particularly in considering the DCFR or CESL as potential
model instruments. Neither the DCFR nor current draft CESL is likely to
provide a useful template for domestic commercial contract law rules in the
field of precontractual liability, for example. Under the CESL rules, parties to
commercial contracts are similarly required to negotiate in accordance with
good faith and fair dealing.48 Of course, in the EU, much secondary legislation
44
Admittedly ‘full-blown’ disputes in this area are comparatively uncommon however the mere
risk that a party may be found liable for having negotiated in bad faith, for instance, may create a
chilling effect on parties and/or a difficult dynamic in cross-border contractual negotiations
generally. It may also encourage parties to commit more time to failing negotiations than they
would otherwise domestically.
45
[1992] 2 A.C. 126
46
See Scottish Coal v Danish Forestry [2009] CSOH 171.
47
Charles Shaker v Vistajet Group Holding SA [2012] EWHC 1329 (Comm), 2012 WL 1684837.
The dispute arose out of a letter of intent for the purchase of an aircraft. It was reiterated that an
obligation to exercise reasonable endeavours is unenforceable in law. Teare J emphasized that the
courts cannot police such an obligation and relying on the view expressed by Potter LJ in Phillips
Petroleum v Enron Europe [1997] CLC 329, at 343 stressed that courts are, “unable to draw a line
between what is to be regarded as reasonable or unreasonable in an area where the parties may
legitimately have differing views or interests”, at pt.11. The court further reinforced that an
obligation to negotiate in good faith is “inherently inconsistent with the position of a negotiating
party”, at pt.7. In Charles Shaker, the court found in favour of the claimant who had argued that,
“just as the obligation to exercise good faith and reasonable endeavours […] is unenforceable, so
the alleged condition precedent […] is unenforceable”. The decision follows earlier cases that
have outlined a very clear judicial standpoint on precontractual negotiations. See, for instance,
including Multiplex Constructions UK Limited v Cleveland Bridge UK Limited [2006] EWHK
1341, at paragraphs 633-639 and Barbudev v Eurocom Cable Management Bulgaria EOOD
[2012] EWCA Civ 548.
48
Art. 2b (under CESL Article 2 on ‘Definitions’) defines ‘good faith and fair dealing’ as “a
standard of conduct characterised by honesty, openness and consideration for the interests of the
other party to the transaction or relationship in question”. Art. 2(3) (The CESL Part I on
Introductory Provisions) indicates that, regardless of their status, the parties may not exclude the
16 imposes concrete precontractual information duties in B2C contracts, however
the drafters of the DCFR opted to abandon the distinction between B2B and
B2C contracts. Under both the DCFR and the draft CESL, contracting parties
are also subject to a broad, generalised duty of disclosure. Though traders may
exclude or vary the duty of disclosure under Article 23(1) CESL, the default
position provides that parties are required “to disclose to their contractual
partners information concerning the main characteristics of the goods, digital
content or related services to be supplied which the supplier has or can be
expected to have and which it would be contrary to good faith and fair dealing
not to disclose to the other party”. In determining whether a party has
complied with the disclosure duty regard is to be had to the untried and
untested standard of “good commercial practice”, among other factors.49
Macgregor has previously argued that complying with such a standard would
involve ‘costs and possible [legal] uncertainty’ for business.50
31. Another key related area that deserves particular consideration in domestic
contract law is how the courts should best deal with vague commercial
commitments such as to use ‘reasonable’ or ‘best endeavours’ that are
ubiquitous in practice. In a raft of commercial agreements, and particularly in
real estate contracts, parties often give such undertakings without much
thought as to the legal implications. This is one area of contract law in practice
where it can be difficult for lawyers to adequately advise on the legal
implications in the event of a dispute. As has been stressed, ‘the actual
meaning of these expressions, and the extent of the [legal] obligations they
impose, is not entirely clear’. In addition, the case law creates a somewhat
complex and confusing picture.51 Similarly, where commercial parties operate
in different jurisdictions or there is a degree of suspicion or uneasiness
regarding another party’s commitment to a budding deal, the parties may more
frequently fall back on letters of intent, memoranda of understanding and
other ‘non-binding’ written statements. This again can be the source of
friction in the contractual relationship and/or protracted, costly litigation. Such
commitments prove problematic nationwide but they are potentially damaging
for parties if used when contracting cross border.52
32. Finally, more may need to be done in specific sectors of the economy to
curtail unfair commercial practices not only to protect consumers but also to
protect SMEs from larger, more bullish companies. In specific sectors,
application of good faith and fair dealing or derogate from or vary the effects of Art 2 CESL (the
good faith and fair dealing provision).
49
See L. Macgregor, ‘Report on the Draft Common Frame of Reference: a report prepared for the
Scottish Government on the Principles, Definitions and Model Rules of European Private Law’
(Edinburgh, March 2009). Macgregor noted at that time that, ‘[B]ecause there is no tradition in
Scotland of providing such information, this [disclosure] standard may be difficult to apply’. It
should nonetheless be stressed that Macgregor concluded her survey of the DCFR arguing that the
‘precontractual duties to negotiate in accordance with good faith and fair dealing are balanced
[under the DCFR], and welcome in a B2B situation’. The report is available via:
http://www.scotland.gov.uk/Publications/2009/03/05095153/0 (last visited, 6 June 2012).
50
Ibid.
51
Litigation e-bulletin, Herbert Smith, 3 September 2010.
52
For a discussion of the law governing precontractual reliance and the impact of preliminary
agreements in European and US legal practice, see M. Doris, ‘Bargaining and Reliance in new
European contract law’, http://www.indret.com/en/?ed=32 (last visited, 6 June 2012)
17 targeted government intervention may further be required to enhance the
bargaining power of subcontractors. In the construction industry, for example,
concerns have been raised recently in New South Wales at the extent to which
subcontractors can be left facing financial ruin in the event that principals
cease to operate. Legislation does currently exist that aims to protect
subcontractors, including the ‘Security of Payments’53 law in such situations,
yet in practice many of the contractual difficulties typically facing
subcontractors stem from weaknesses in bargaining power at the
precontractual stage, as they are often operating from a notably weak
bargaining position. As such, they are frequently unable to secure more
favourable contractual terms.54
IV.
The wider risks and the limited impact of ‘optional’ contract law rules
33. The Attorney-General’s Department has further raised the possibility of
distinguishing between domestic and international contracts and asks for
stakeholder views on whether any would-be reform should be based on an
opt-in, opt-out or mandatory model.55 Any moves toward a new mandatory set
of rules is likely to be strongly resisted by business, particularly by large
commercial entities that frequently benefit from those very technicalities and
inadequacies in the law that the Government appears keen to address. Yet
there is equally a need for caution when contemplating new contract rules that
could be adopted by parties purely on an opt-in basis. At first blush, optional
rules appear unthreatening, as parties are not required to adopt them into their
contracts. Proponents also argue that they increase the choice of default rules
available to contracting parties. However, such rules do carry latent risks both
for the contracting parties and, perhaps more notably, for domestic contract
law systems.
34. In the first instance, and in seeking to ‘internationalise’ the law of contract
(including sales law), the Government should not hastily overlook the
increasing impact of the UN Convention on Contracts for the International
Sale of Goods (CISG) 1980 throughout the Asia-Pacific region. Many of
Australia’s leading trading partners, including China, the United States and
Japan, are signatory states of the CISG, having ratified the Convention. Of
course, the Attorney-General’s Department, citing Spagnolo,56 has correctly
53
For the relevant legislation in New South Wales, see: The Building and Construction Industry
Security of Payment Act (NSW) 1999. The application of the Act is further well explained for
users online, see: http://www.securityofpayment.com.au/nsw.php?hide=true (last visited, 6 June
2012).
54
The recent financial collapse of the construction arm of the St. Hillier group is a useful example.
The collapse stalled work on a series of public housing projects in Sydney and across New South
Wales and had a significant financial and emotional impact on many of the subcontractors
involved.
55
n 1 above, at 20-21.
56
L. Spagnolo, ‘The Last Outpost: Automatic CISG opt outs, misapplications and the costs of
ignoring the Vienna Sales Convention for Australian Lawyers’ (2009) 10(1) Melbourne J Intl L
141. For a more recent overview, see B. Hayward and P. Perlen, ‘The CISG in Australia – The
jigsaw puzzle that doesn’t fit’ (2011) 15(1) Vindobona J of Intl Comm Law and Arb 119 (noting
that ‘in many respects the CISG and Australian domestic law are happily married together’, at 140,
but that gaps and inconsistencies between domestic sales law and the Convention endure,
including as a result of specific provisions of Australian consumer law). The authors further
18 identified the frequent neglect of the CISG in Australia, both by the judiciary
and by academics. The discussion paper also highlights the strong tendency
among practitioners in Australia – as is the case in other common law
jurisdictions, most notably the US and Canada – to tailor contracts on behalf
of their clients in order to avoid the Convention.57 Yet recent studies suggest
that the CISG is gaining a notable foothold in China and that increasingly the
Convention is being faithfully applied by arbitrators. This is particularly the
case in CIETAC arbitrations.58 Considering therefore the established, albeit
imperfect, position of the CISG in the region and the large body of existing
international case law, added to the increasingly prominent role played by the
CISG Advisory Council, the Attorney-General’s Department ought reasonably
in the first instance to consider initiatives aimed at improving the domestic
application of the UN Sales Convention. This would certainly be preferable to
initiating a major academic research project modelled, for example, on the
European DCFR process. The Government should furthermore reflect
carefully on the views of law-and-economics scholars who warn that optional
default rules can in practice serve to increase transaction costs for users.
35. It bears repeating that, particularly where optional contract law rules are
considered to bear the imprimatur of State institutions they can quickly
develop a momentum of their own. If a set of Australian default rules were
indeed to emerge at some later point, a gradual path-dependency could set in
promptly thereafter and this could prove problematic if such rules were later
to prove defective in practice. It would also be damaging if they were later to
be considered inferior to those currently existing under State and Territorial
laws, given the likely difficulty in generating the political will and drive to
remove or amend any new defective or malfunctioning rules. Such a process
could further risk creating new, unintended conflicts with the CISG that may
be difficult to address, again considering the low incidence of publicly
litigated CISG disputes and a likely lack of political momentum.59 With a new
optional set of default rules, the business community, the legal profession,
consumer advice groups and other stakeholders would still be required to
acquaint themselves with the operation of the new instrument, regardless of
whether or not they choose ultimately to make use of it. And yet an analysis of
the Government’s preliminary thinking in this regard reveals a notable parallel
with the views of European regulators. The stated aim of the draft optional EU
highlight an apparent disconnect between the treatment of domestic sale of goods contracts
involving software and the approach of the CISG following the decision in St. Albans City and
District Council v International Computers Ltd [1996] 4 All ER 481. The case concerned the Sale
of Goods Act 1923 (NSW). See also, J. Douglas, n 9 above (noting at 342 that ‘optional
instruments (such as the UN Sales Convention) must overcome a great deal of legal and
commercial inertia before they affect the substantive law significantly’).
57
As is correctly identified in the Attorney General Department’s discussion paper at para. 5.11.
58
See, inter alia, M.R. Shulman & L. Singh, ‘China’s Implementation of the UN Sales Convention
through Arbitral Tribunals’ (2010) 48 Colum J of Trans L 242; and Cf. Dong Wu, ‘CIETAC’s
practice on the CISG’ (2005) 2 Nordic J of Comm L, available at:
http://cisgw3.law.pace.edu/cisg/biblio/wu.html (last visited, 1 June 2012).
59
The number of CISG disputes in Australian courts according to the UNILEX database is
currently twelve, which is highlighted in para 5.4 of the discussion paper. See
http://www.unilex.info/dynasite.cfm?dssid=2376&dsmid=13354&x=1 (last visited, 6 June 2012)
which further indicates that there have been no reported decisions since 2010.
19 sales law is to reduce transaction costs and create additional choice for parties
through the development of an optional set of rules that parties would be free
to ignore. Proponents of an optional 28th EU sales law regime have stressed
these apparent advantages and have suggested that it removes from play the
concerns of those stakeholders who fear the ‘imposition’ of centralised,
mandatory rules. The optional instrument is further promoted as a tool for
increasing party autonomy. The Attorney-General’s Department appears to be
equally persuaded of the merits of optional rules, and notes in the consultation
paper that:
‘an opt-in model would minimise the risks involved in reform. Under this
model, it is argued, contracts would be governed by the existing law but
that users of contract law could ‘make their own assessment on the merits
of the new rules’.60
36. Unfortunately this overlooks the realities of the market. In practice the
existence of an optional set of rules creates unnecessary complexity and a new
layer of law, which to ever properly function in practice, will need to be
interpreted by the courts. Indeed the discussion paper is candid in highlighting
that ‘education would be necessary to give parties and practitioners the ability
to assess the new rules on their merits’.61 Such an ‘education’ would however
have significant cost implications for users, and the debate surrounding the
European optional sales instrument provides timely consideration of the sorts
of risks underlying an optional set of default rules. Indeed it is little surprise
that a broad range of commentators are suggesting that the current draft CESL
should be either redrafted or simply abandoned. The provisions of the
Common European Sales Law firstly mark a significant departure from
existing laws found in individual Member States and would, if implemented,
impact negatively in practice in all jurisdictions. As Cafaggi observes:
‘the emerging picture in the Common European Sales Law (CESL) is
rather complex and enhances the fragmentation of regimes currently in
place, thereby multiplying, instead of reducing, search and transaction
costs’.62
As a consequence, if introduced across the European Union, the CESL will
give rise to:
‘a multilevel regime of sales law which partitions regulation along the
international, European and Member State levels, according to the status
of the contracting parties beyond the now-consolidated partition between
B2B and B2C parties”.63
60
At n 1 above, at para. 7.4. It should be noted that the Attorney-General’s Department does
recognize some of the limitations of opt-in rules briefly at para 7.5. The discussion paper also
stresses that ‘[SMEs] and individuals may be less likely to have the legal sophistication to elect to
use opt-in rules’.
61
At n 1 above, at para. 7.5.
62
F. Cafaggi, ‘CESL and precontractual liability: From a status to a transaction based approach?’
(European Contract Law: A Law-and-Economics Perspective conference, Chicago, April 2012) at
2.
63
Ibid at 3.
20 Where applicable, as Cafaggi notes, international sales contracts between
purely commercial actors will continue to be regulated by the UN Sales
Convention. Contracts involving large and small-to-medium sized enterprises
may be governed by the new CESL, if implemented, or national systems
including the CISG; whilst dual regimes, either the CESL regime or the
national regime, could potentially apply to B2C contracts. This would
generate needless legal uncertainty and it is little wonder why negative
reaction has been swift. The optional character of the instrument would not
allow commercial parties simply to ignore the instrument, as has been
suggested. The CESL will, if implemented, gradually become ‘mainstreamed’.
Most notably, SMEs in borderline transactions are likely to be attracted to the
instrument, where wider search and transaction costs would be unjustified,
and the ‘neutral’ character of the optional instrument is likely to be seen as a
strong justification for adopting it, particularly in ‘first-time’ contracts
involving parties with no prior business relationship.
37. There is furthermore the underlying risk that new, inferior optional contract
rules gradually become the default position and that regulators seek to switch
the ‘opt-in’ model to an ‘opt-out’ model. Indeed the Attorney-General
Department’s discussion paper raises the possibility of introducing a body of
new contract rules that could with time become the ‘default position’, thereby
applying to a broader range of transactions.64 On a positive note there is
recognition up-front by the Department that such a move could be costly in
the event that changes to the law ultimately prove to be economically
inefficient. Yet the risks underlying any new optional set rules, including on a
purely opt-in basis, should not hastily be disregarded. Even two ‘competing’
contract law regimes would create unnecessary transaction costs for those
businesses with sufficient resources to consider both options. For B2C
contracts, SMEs in particular are only likely to opt-in to such new rules if they
result in lower standards of consumer protection on a comprehensive scale, or
if they are seen as providing other practical and/or economic benefits. An
added complication is the design of the specific rules. If any new domestic
default rules are similar in design to those found in the CESL, and there is a
heavy reliance on general clauses and/or novel concepts, untried and/or
untested domestically, it is highly probable that business will simply refrain
from adopting these rules, unless and until required to do so.
38. In addition it is debatable whether the current draft CESL would in practice
encourage opting-in. A number of leading US commentators suggest that the
CESL is ‘hostile’ to any inter-jurisdictional competition over contract terms.
Epstein warns that ‘the gains from the voluntary portion of the deal will be
eroded by the implicit losses that both parties sustain when the state engrafts
its own requirement to their agreement’.65 He considers the CESL to be a
64
The Department raises the possibility of an ‘opt-out’ model at para 7.6. of the discussion paper
(n 1 above).
65
Epstein laments the ‘threadbare justifications for optional new [EU] rules [under CESL]’ and
supports the view of Bar-Gill and Ben-Shahar that they are ‘truly breathtaking in their scope’ in
that they cover ‘mandatory provisions and binding disclosures, in addition to mandated rules for
entering and exiting contracts, and sticky pro-consumer default terms’, see Epstein, n 32 above, at
7, and citing O. Bar-Gil and O. Ben-Shahar, ‘Regulatory Techniques in Consumer Protection: A
21 ‘state imposed tie-in arrangement’ and argues that ‘this brand of
harmonisation sends the implicit message that more regulation is better,
without offering any empirical check on that sweeping proposition’. 66 It is
difficult to fault Epstein’s assessment.
V.
Possible paths forward
39. The Attorney-General Department’s has raised a raft of timely questions on
both the current state and the possible need to reform the law of contract. The
business community, consumer groups, academics and other stakeholders will
likely welcome the initiative. Moreover, in time it is very probable that a
consensus view will emerge that is broadly similar to that which developed at
an early stage in the European debate. It is highly likely that stakeholders will
favour the simplification of existing legislation and the removal of outdated or
cumbersome rules. There may also be provisional support for academic work
to begin on the compilation of a modern Restatement of the domestic law. In
time, there may similarly be parallel moves towards the establishment of an
Australian Law Institute, which in itself would be a positive development.67
40. Yet going forward it will be crucial to avoid imitating many of the recent
European misadventures in the area of contract law. Despite a series of high
profile political and academic initiatives during the last decade, the internal
market continues to operate without an overarching and uniform EU contract
law and, as the Commission itself acknowledges, ‘the knowledge of
fundamental consumer rights remains disappointingly low among both
consumers and businesses’.68 Indeed it is questionable whether a uniform law
of contract aimed at improving the functioning of the internal market is either
realistic or desirable. The coherence initiative has arguably thus far produced
more heat than light. Spearheaded primarily by academic study groups
broadly in favour of a future European civil code, it is perhaps unsurprising
Critique of the Common European Sales Law’ (European Contract Law: A Law-and-Economics
Perspective conference, Chicago, April 2012). Cf. C. Mak, ‘In Defense of CESL’ (European
Contract Law: A Law-and-Economics Perspective conference, Chicago, April 2012) (who,
similarly to Hesselink, emphasises the merits of a ‘legal-political’ CESL). See also the rather
defensive views expressed by Eric Clive in support of the current CESL draft at:
http://www.law.ed.ac.uk/epln/blogentry.aspx?blogentryref=8912 (last visited, 6 June 2012) (who
suggests that much of the opposition to CESL by leading US law-and-economics ‘gurus’ can be
explained away by these scholars’ ‘free market’ stance). For a more in-depth analysis of Clive’s
views on CESL generally, see E. Clive, ‘A General Perspective on the European Commission’s
Proposal for a Common European Sales Law’ (2012) 19(1) Maastricht J Eur & Comp L 120.
66
n 32 above, at 7.
67
The recent establishment in 2011 of the European Law Institute is in part the product of the
‘coherence’ initiative in EU contract law. Indeed the case for such an institute was broadly
sketched by private lawyers in response to developments in the field of EU contract law. It has
been pointed out that such an institute could play an important flanking role, particularly in the
absence of a supporting common EU legal culture. See for example, M. Doris, ‘The Continued
Resonance and Challenge of the ‘ius commune’ in Modern European Contract Law’ (2006) 34(2)
Intl J Leg Info 14 (advocating a European Private Law Association. Doris promoted such an
EPLA particularly as a means of encouraging the development of the Common Frame of
Reference).
68
See Consumer conditions scorecard, 7th edition, May 2012. Available at:
http://ec.europa.eu/consumers/consumer_research/editions/doc/7th_edition_scoreboard_en.pdf
(last visited, 6 June 2012).
22 that it has generated a series of codification-styled legal instruments. Yet these
draft instruments are not only ill-suited for international markets but pose risks
in consumer markets.69 The DCFR and the draft CESL rest on weak economic
foundations and the EU institutions have received little real return on a heavy
investment of time and resources. There is also a clear contradiction at the
core of the current European debate that is little considered. On the one hand,
proponents of a European contract law advocate the goal of a uniform law on
the basis that it has the potential to reduce business and consumer disputes. On
the other hand, many of the same proponents regularly emphasise the need for
new European private law courts to handle an anticipated increase in the
number of disputes arising out of the new rules.
41. Increasingly it would appear that the EU coherence initiative erred both in
moving away from the need for detailed empirical enquiry and when it began
prioritising research on the academic DCFR. Clearly the neglect of detailed
empirical enquiry has instead allowed for work to progress on compiling legal
instruments that are well suited for the lecture hall but not for users in
practice. The EU institutions appear to have been blindsided by focusing on an
end product despite strong indicators that businesses operating in the internal
market have no need for a pan-European civil code.70 Moreover, neither
European businesses nor consumers seemingly benefit significantly from the
current draft CESL. The EU institutions, driven on principally by the
academic consortium leading the reform process, have also rushed the draft
CESL to market with undue haste and it is perhaps unsurprising that leading
commentators are suggesting that it should be shelved.
42. The Attorney-General’s Department ought reasonably therefore to reflect on
the extent to which developments at the European level have been hampered
particularly by the design strategy adopted at an institutional level. Defining
the parameters of any new initiative at an early stage will likely avoid any
would-be domestic reform project from becoming unwieldy and unduly
costly. It would certainly be preferable to begin restrictively and to develop
‘bottom-up’. It will also be crucial to adopt an empirical approach from the
outset and ensure that no one group of stakeholders in effect monopolises the
reform process.
69
As evidenced in part by the decision in mid 2011 to exclude the financial services sector from
the scope of any optional instrument on EU contract law.
70
This view is shared by Simon James, a partner at Clifford Chance, who argued back in early
2011 that for the European institutions, ‘the act of passing the law is what matters’ and not
necessarily the content or quality of the instrument, see S. James, ‘European Contract Law: the
Politics of Law’, Clifford Chance in-house publication (31 March 2011), available at:
http://www.cliffordchance.com/publicationviews/publications/2011/03/european_contractlawthep
oliticsoflaw.html (last visited, 6 June 2012). Hesselink has been one of the few proponents of the
CESL who has publicly advocated for the instrument as much for its wider political merits, as for
any strong economic case in its favour. See M.W. Hesselink, ‘The Case for a Common European
Sales
Law
in
an
Age
of
Rising
Nationalism’
(2012)
Available
at:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1998174 (last visited, 1 June 2012) (noting
that the CESL should be considered as an instrument that boosts a sense of ‘European identity’
and enshrines ‘just rules’ for the internal market). Whilst the argument that the CESL enhances a
sense of European identity is unpersuasive, the current draft CESL, despite its many weaknesses,
does currently offer a notably strong pro-consumer body of contract rules.
23 43. As leading US law-and-economics scholars emphasise, the harmonisation of
private law rules and the standardisation of consumer protection laws are not
ends in and of themselves. Indeed there are practical advantages to a
continued competition between various contract law regimes domestically,
and differentiated consumer rules can often result in lower prices and other
advantages for consumers. Maintaining a degree of competition across State
boundaries can have positive side effects in this regard and in the pursuit of
the ‘better rule’. Indeed, it is often overlooked that competing systems of
private law can serve as ‘legal laboratories’ for the development of new
contract law rules and doctrines. In short, therefore, empirical enquiry should
dictate the pace of the reform process and particular attention should be
devoted to examining what features of the domestic Australian legal system
are particularly attractive to overseas businesses. It would also be particularly
useful to have a more complete picture of consumer purchasing habits both
domestically and cross border, and greater clarity on the types of goods and
services typically purchased online. In the absence of a more accurate picture,
it is crucial not to over state nor to over dramatise the difficulties experienced
by business and consumers operating under the current domestic contract law.
Indeed the Government should exercise particular caution in seeking to off-set
any perceived inadequacies in the absence of reliable supporting data. New
‘solutions’ to perceived inadequacies can often produce unintended
consequences that may have the effect of making business-to-consumer (B2C)
transactions in particular, including cross border contracts, more costly and
therefore less attractive.
44. Finally, rather than focus exclusively on the substantive law of contract,
attention ought reasonably to turn towards the procedural enforcement of
private law. As part of the ongoing reform process, the Government should
commission a series of parallel studies to explore the current state of
consumer confidence in domestic and cross border markets, and to examine a
heightened role for online dispute resolution (ODR) in business-consumer
disputes. It would certainly do little harm for regulators to introduce similar
reforms to those currently being proposed at EU level aimed at cementing
consumer ODR. This form of dispute resolution has the real potential to
significantly reduce transaction costs. Though under explored in the literature,
new purely public and/or public-private initiatives aimed at developing
functioning ODR platforms for consumer dispute resolution may also offer
new, more creative ways of improving the general accessibility of the law of
contract and other related fields of private law.
24