Constitution 20
Private Law I
The CESL Proposal: an overview
Hugh Beale
Nature of the CESL
• Optional Instrument
• Forming part of each Member State’s
law
• Parties may choose to use
• Will govern in place of domestic rules
– Issues within scope
• Does not replace domestic contract law
Background
• EU Commission’s Communication on
European Contract Law (2001)
– Differences hinder trade between MS
• Intuition
– Larger firms less affected
•
•
•
•
Subsidiaries
More sophisticated
Larger or more transactions
Less risk averse
– Barriers psychological if not real
Action Plan on A More
Coherent European
Contract Law (2003)
• Improve the acquis using a Common
Frame of Reference
• Reflect on an optional instrument
The Way Forward (2004)
• CFR
– Fundamental [Guiding] Principles
– Definitions
– Model rules
– (Essential background information)
• To be used in revising and further
harmonising
– by altering domestic law
• [basis of possible Optional Instrument]
Aim of consumer Directives
• Before +/- 2003
– Internal market
• Minimum rights
• “Confident consumers”
– Consumer protection in own right
• After 2003
– Encouraging cross-border sales
– Removal of barriers to businesses
• Later: B2B as well as B2C
B2C: The “Rome I problem”
• Parties may choose applicable law
• Seller may use own terms
• Rome I art 6
– Consumer entitled to mandatory rules of
Law of state of habitual residence
• If directed at that state
– Business selling across borders
• Must know laws of each country targeted
– Internet shops: 28 laws?
The Way Forward (2004)
• Review of 8 consumer directives
– Green Paper (2007)
• From minimum to full harmonisation
Consumer Rights Directive
• 4 Directives
• Doorstep and Distance Selling
• Unfair terms and Sales
– Little additional consumer protection
– Full harmonisation
• Failure
– Major interference with domestic laws
– Or narrow in scope
• Final version
– Distance and off-premises contracts only
CESL: new approach
• Optional Instrument
– Forming 2nd part of each MS law
– Does not replace domestic contract law
– Cf CISG but “opt-in”
• Own mandatory rules
– Displacing “domestic” mandatory rules
– High level of consumer protection
– Must adopt as whole: Reg art 8(3)
• Rome I art 6 does not cause problems
– CESL part of law of C’s habitual residence
Scope: Types of contract
• Art 5
• Sales, digital downloads
– + related services (installation, maintainance)
• Not “mixed-purpose” contracts (Art 6(1))
• Nor consumer credit contracts (Art 6(2))
Scope: Cross-border
contracts
• B2C (Art 4(3))
• either the address indicated by the consumer, the
delivery address for goods or the billing address
are located in a country other than the country of
the trader's habitual residence; and
• at least one of these countries is a Member State
• B2B (Art 4(2))
• if the parties have their habitual residence in
different countries of which at least one is a
Member State
Scope: topics
• Issues within scope: Recital 27: not e.g.
– legal personality
– the invalidity of a contract arising from lack of
capacity, illegality or immorality
– the determination of the language of the contract,
matters of non-discrimination
– Representation
– plurality of debtors and creditors
– change of parties including assignment, etc
• Left to “pre-existing rules” of otherwise
applicable law
Advantages for traders
• Advantages in both B2C and B2B
– “Neutral” set of rules, applied uniformly
– Available in many languages
• B2C
– Avoids multiplicity of mandatory rules
– Trade off:
• high level of consumer protection, higher than
in some MS
• but single system
– MS may allow in domestic sales (Art 13(a))
Advantages for consumers
• High level of consumer protection
– Beyond minimum EU requirements
– Greater than in many laws
• Consumer resident in MS with lower CP
– Will get greater protection
• Consumer resident in MS with higher
CP
– slightly lower protection, better choice and
prices
Safeguards for consumer
• Explicit statement, separate from main
agreement, consenting to use the CESL
– Not just a standard term
– “Blue Button”
– Confirmation on durable medium
• Standard information notice
– ELI: better to have link to website where
differences explained
• High level of consumer protection
High consumer protection
• Pre-contractual information
– CRD: “integral part of contract”
– CESL: damages for breach of duty
• Unfair terms
– Black list: always unfair
– Grey list where presumption that unfair
• Remedies
– S has no right to cure before C seeks
termination/ price reduction (no “hierarchy”)
– No time limit on termination
Advantages for B2B: SMEs
• Larger firms less affected
– More sophisticated
– Large transactions little affected
• Cost of advice proportionally lower
– Less risk averse
• Some SMEs do sell c/b
– Suspect many SMEs put off c/b business
– SMEs in particular may be encouraged by
• Neutral” set of rules, applied uniformly
• Available in many languages
B2B: substance of rules
• Differences between laws not only issue
• Lack of sophistication/ advice
– May not read/understand other party’s
terms
– May not ask right questions
– May not anticipate other’s opportunistic
behaviour
• SMEs need protection via mandatory
rules
Differing laws
• Estonian Contract Law
– Provides protection, “communitarian”
• English law
– Individualistic
• Limited control over unfair terms
– None in international contracts
• Limited doctrine of mistake, no duty to disclose
• No general doctrine of good faith
• Parties left to specify what other must do
Is CISG suitable for SMEs?
• CISG incomplete
– Limitation
– Validity
– Unfair terms
– Good faith only for interpretation of CISG
• Fall back on national law
– Uncertainty
– Lack of protection
• Especially in international contracts
Which law for SMEs?
• SME’s
– Assume risk averse
– Would welcome protection
• Duty of disclosure
– Mistake, fraud by silence, duty to inform…
• Unfair terms
• Good faith and fair dealing
CESL: Unfair Terms art 86
(1) In a contract between traders, a contract
term is unfair for the purposes of this Section
only if:
(a) it forms part of not individually negotiated
terms within the meaning of Article 7; and
(b) it is of such a nature that its use grossly
deviates from good commercial practice,
contrary to good faith and fair dealing.
CESL: mistake art 48
(1) A party may avoid a contract for mistake of fact or law existing
when the contract was concluded if:
the party, but for the mistake, would not have concluded the
contract or would have done so only on fundamentally different
contract terms and the other party knew or could be expected to
have known this; and the other party:
(i) caused the mistake;
…
(iii) knew or could be expected to have known of the mistake and
caused the contract to be concluded in mistake by not pointing
out the relevant
information, provided that good faith and
fair dealing would have required a party aware of the mistake to
point it out; or
(iv) made the same mistake.
Duty of disclosure: art 23
(1) Before the conclusion of a contract for the sale of
goods, supply of digital content or provision of related
services by a trader to another trader, the supplier
has a duty to disclose by any appropriate means to
the other trader any 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.
CESL: Good faith art 2
(1) Each party has a duty to act in accordance
with good faith and fair dealing.
(2) Breach of this duty may preclude the party in
breach from exercising or relying on a right,
remedy or defence which that party would
otherwise have, or may make the party liable
for any loss thereby caused to the other party.
(3) The parties may not exclude the application
of this Article or derogate from or vary its
effects.
Subsidiary role: recital 31
The principle of good faith and fair dealing
should provide guidance on the way parties
have to cooperate. As some rules constitute
specific manifestations of the general
principle of good faith and fair dealing, they
should take precedent over the general
principle. The general principle should
therefore not be used as a tool to amend the
specific rights and obligations of parties as
set out in the specific rules…
SME dealing with LB
• Consumer-like protection
– LB will face increased costs
• Additional information
• Uncertainty
• Delay because more contested
– May charge more/pay less
– Will SME be prepared to pay premium?
– Suspect many risk averse
– If don’t want protection, need not choose
CESL
SME dealing with another
SME
• May be on either side of the fence
– Own terms may be challenged
– May fail to give information
– Own behaviour can be challenged
• Think will still prefer protection
– Can control own behaviour
• E.g. make terms transparent
– May use CESL as signal of honesty
Advantages of CESL for B2B
• Better for SMEs than CISG, English law
• “Estonian law in English”
• Lower costs of cross-border transactions
– Single system in multiple languages
• MSs should exercise option to allow
– When neither is SME
– use in domestic transactions
A major concern
• SMEs can learn to ask for CESL
• Should mean they have protection
– Protective provisions mainly mandatory
• Risk if other party can “cherry pick”
• Partial adoption permitted?
– Art 8(3) allows CESL without protective
rules
– Provisions making mandatory rules are in
each chapter
• Should be all or nothing, as for B2C
Risks
• Uncertainty until case law
– Database
• Delay and cost of ECJ applications
• Interface with domestic law
– What is in scope?
• Penalty clauses? Negotiated terms? Unfair
Commercial Practices?
– Risk of “public policy” arguments (Rome I
art 9)
Disincentives to SMEs
selling cross-border
• Not the only problem
– Local delivery issues [?]
– Local payment systems [?]
– Language problems
• Sales information
• Complaints and warranty claims
– Doubt about demand
• C faces same problems in reverse
• But CESL may help