The European Commission (Commission) estimates that contract law barriers deter businesses from conducting at least €26 billion in intra-European Union (EU) trade every year. In October 2011, the Commission published its proposals for an EU Regulation on the Common European Sales Law (CESL) as a solution to the challenges to cross-border trade caused by the divergent contract laws of EU Member States. The UK Government is not convinced that the introduction of the CESL will be as beneficial as the Commission claims and it is concerned that a cost/benefit analysis has not been conducted properly. As a result, the UK Ministry of Justice has launched a consultation (MoJ Consultation) to ascertain public opinion in order to develop the UK Government’s position on the CESL and its future negotiation strategy in the EU.
Background
The Commission has sought the introduction of the CESL for over a decade as a means of improving cross-border trade within the EU. The Commission believes that the CESL has the potential to increase cross-border trade, which will directly benefit businesses and customers. It further believes that, currently, the smooth functioning of a single market in the EU is prevented by contract law barriers caused by the divergence in Member State national contract laws and the high costs and complicated nature of expanding into new markets, particularly for small businesses.
Scope of The CESL
According to the Commission, the CESL could be used to govern cross-border, business-to-consumer contracts and business-to-business contracts where at least one of the businesses meets the CESL definition of a “small enterprise” or a “medium enterprise”.
The CESL would not replace existing national contract laws, but would be an alternative contract law regime, available in all EU Member States. It would apply only if all parties voluntarily and expressly agreed to it.
The CESL has a wide application covering contracts for the sale of goods, the supply of digital content (e.g., music, videos, smart phone applications and software) and “related service” contracts. Related service contracts are defined under the CESL as service agreements undertaken with the seller of the goods, which relate to the goods themselves, e.g., installation or maintenance contracts. The CESL could be applied to all these contract types, irrespective of whether they are concluded on business premises, away from business premises, or online.
The Commission’s proposal is for a comprehensive set of uniform contract law rules encompassing the “entire life cycle” of the applicable contract. Consequently, the proposed CESL sets out
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The general principles of contract law that all parties will need to observe, including good faith and fair dealing.
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The parties’ rights to receive essential pre-contractual information and rules on how agreements are concluded between two parties.
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General provisions on the interpretation of contract terms and rules on the content of contracts, such as which contract terms may be unfair and are therefore invalid.
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Remedies for non-performance and interest on late payments.
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Consumer rights to withdraw from distance contracts (online) and off-premises contracts (those not concluded in a shop or place of business).
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Parties’ rights on termination.
Implications for Businesses and Consumers
According to the Commission, the proposed CESL will positively affect business organisations that have existing international dealings and those contemplating new business opportunities with businesses or consumers in other jurisdictions. The CESL is also anticipated to directly addresses digital products and trading via the internet, as these are areas of commerce that are cross-border in nature. As a result, e-commerce businesses would be affected heavily by the introduction of the proposed CESL.
The Commission suggests that by increasing cross-border trade, the CESL also has the potential to give 500 million consumers across the EU access to a greater choice of goods, potentially at lower prices. The Commission argues further that the CESL is also an opportunity to ensure the same high level of consumer protection is available throughout the EU, providing consumers with certainty and a level of quality against which they can judge other contracts.
However, the true impact of the CESL is dependent on the extent to which it is applied, given that it is an optional instrument that requires active election. If embraced in the market, the CESL undoubtedly would mean a change in the way cross-border sales of goods, digital content and related services are conducted. Uptake may be limited by the fact that the CESL is not designed to be applied to intra-member state transactions, meaning businesses would still have to bear the costs associated with administering contracts under two different sets of laws for intra and inter jurisdictional business.
Implications for The United Kingdom
The UK Government, the Law Society, the Bar Council, the Scottish and English Law Commissions and the consumer watchdog Which? have all raised concerns in relation to the proposed CESL. One of the major concerns is that the concepts of good faith and fair dealing, central to the proposed CESL, do not translate into English law. Further, some of the proposed rules of interpretation of contract terms actually contravene English law principles. As such, there is some apprehension that the introduction of the CESL could lead to more uncertainty for businesses and consumers with a preference for using English law as the governing law of their contracts, many of which will be in the United Kingdom.
Responses to the MoJ Consultation are sought from anybody with an interest in the proposed CESL. The MoJ Consultation is canvasing opinions in relation to the general principle of having a common European contract regime, as well as seeking views on the scope, content and impact of the specific proposals made. In particular, the Government is eager to determine the potential costs and benefits. The MoJ Consultation will remain open until 21 May 2012. Should you wish to participate in this process you can access a copy of the consultation on the Ministry of Justice’s website by clicking here.
Keo Shaw, trainee solicitor at the London office, has contributed to this article.