European Scrutiny Committee Contents

4 European contract law



COM(10) 348

Green Paper on policy options for progress towards a European Contract Law for consumers and businesses

Legal base
DepartmentMinistry of Justice
Basis of considerationMinister's letter of 14 March 2011
Previous Committee ReportHC 428-vi (2010-11), chapter 7 (3 November 2010)
To be discussed in CouncilNot applicable
Committee's assessmentLegally and politically important
Committee's decisionFor debate in European Committee B


4.1 This Green Paper concerns the implications for the internal market of the fact that different national laws of contract operate in each of the individual Member States of the European Union. It suggests this divergence of laws might hinder the smooth operation of the internal market and it sets out various options for how this issue might be tackled, ranging from maintaining the status quo through to a mandatory and common code of contract law. Various alternative approaches within some of the options are also presented. To date, the focus of this project had been on the possibility of creating a Common Frame of Reference (CFR) for contract law. The EU Commission's paper seeks views on whether the project might instead move forward in different ways, which are discussed in the Green Paper itself and summarised below.

4.2 The Commission highlights certain policy considerations in relation to two categories of cross-border transaction: business-to-consumer contracts and business-to-business contracts.

4.3 As regards consumer contracts, the Commission points out that under the Rome I Regulation[22] a cross-border contract is likely to be subject to different laws of contract, depending on where the consumer in question is living and notwithstanding the fact that the parties may have agreed in principle to apply a particular contract law to their contract. The Commission suggests that this imposes additional costs on business, particularly as regards e-commerce transactions. It considers that the proposal for a Consumer Rights Directive, which is currently being negotiated and which is intended to achieve greater harmonisation of key internal market aspects of consumer contract law, should assist business in this respect, but will not completely solve the problem. In particular it will not fully harmonise the national contract laws of the Member States and to that extent the problem of multiple laws applying to consumer contracts will remain.

4.4 As regards business contracts, the Commission points out that commercial entities are free to choose a single law to govern their contracts and can incorporate the substance of existing international instruments, such as the Unidroit Principles of International Commercial Contracts. However they cannot choose a common European contract law which will be applied uniformly in all the Member States. Further, the Commission argues that SMEs may lack the bargaining power to negotiate the application of a single applicable law with which they are familiar and that this may hamper their full participation in the internal market. The Commission argues that a European Contract Law, accessible in all the official languages, could provide additional reassurance for businesses engaged in cross-border trade and represent an attractive alternative to laws of contract which operate within Member States.

4.5 The Commission then sets out seven options that could be followed, which we reported in October last year.[23]

Previous scrutiny

4.6 In his Explanatory Memorandum of 20 July 2010, the Minister of State for Justice (Lord McNally) noted the broad reach of the Green Paper and had concerns about the lack of evidence to support some of the assertions within it. It would be crucial, he said, to establish sound evidence to support any changes in this area.

4.7 He also pointed out that some of the policy options set out by the Commission envisage the adoption of legally binding instruments in order to create uniform provisions of European contract law. These legally binding options marked a significant departure from the Commission's earlier approach to this subject which had focused on the possibility of a CFR, which had not been intended to be legally binding in nature. Indeed, any move beyond this would be a significant shift from the position established in the recently agreed Stockholm Programme, the Minister said.

4.8 The Government had therefore decided to undertake a thorough public consultation, seeking views on each of the Commission's options. It would also test the premise that the current divergence of national law causes difficulties or acts as a hindrance to the internal market. The Government believed that the appropriateness, or otherwise, of any proposed solution should reflect a proper assessment of the nature and extent of any problems which exist.

4.9 Our view of the option of a harmonised European Contract Law was that of our predecessors, and the Government, namely that contract law is a matter best left to Member States to determine. We agreed with the Government that the options for a legally binding European contract law marked a significant departure from the Commission's previous approach. We also agreed with the Government that consultation was essential in order to assess whether there was indeed evidence of problems that could properly be attributed to the lack of a uniform European contract law. So we asked the Government to provide us with a summary of the results of the consultation exercise it was carrying out and its response to the Green Paper.

Minister's letter of 14 March 2011

4.10 The Minister writes with a summary of the responses received from the consultation:

"As you are aware, the European Commission published its Green Paper in July last year. This set out seven main policy options for reform concerning the issue of contract law which included continuing with the existing project aims (the creation of a toolbox to aid legislators) to much more radical options which would result in varying degrees of harmonisation of contract law, including the option of a fully harmonised European contract law code.

"In August last year, my Department undertook a UK-wide evidence gathering exercise to inform the UK position and response to the Green Paper. That exercise was completed in early December 2010. A total of 54 responses were received from groups and individuals representing a broad spectrum of interests including academics, legal practitioners, business (both big and small), finance, insurance, shipping and exports and consumer groups.

"The results of the evidence gathering exercise showed clearly that most respondents considered there was no clear demonstrable and proportionate need for any of the more radical changes proposed, such as harmonisation of contract laws or even the establishment of an optional contract law code. Most wanted the project to continue working on the previously established aims and not pursue more radical reform. While there was interest from a few respondents to the "optional instrument" proposal (which the Commission has made clear it favours), this interest seemed more in favour of the notion of exploring the option rather than a commitment to such an approach.

"The Government agrees that the delivery of what was broadly the previous project aims (those described in Options 1 and 2a of the Green Paper) would be a useful and practical approach. Given the lack of reliable evidence of need for any of the new legislative options and the problems that might be associated with them, you will see the UK response to the Commission did not support any of the other options. Given the Commission's open support for the optional instrument approach the response also offers some commentary on some of the main issues that might arise in association with such a proposal."

4.11 The Minister also encloses the Government's response to the Green Paper. It says, in summary, that:

  • the UK considers there is no reliable evidence available to show that the current arrangements under discussion here, and in particular the current divergence of national laws of contract, cause a problem that affects the proper functioning of the internal market. The UK considers there is no demonstrable need established for any of the options beyond options 1 and 2a. As a result, the UK therefore favours options 1 and 2a only, which seem the most proportionate and potentially offer real improvements in the quality of legislation in this sphere for the future. This is also most in line with established Council recommendations;
  • none of the other options (3-7) are considered necessary or proportionate given the lack of evidence of need and the difficulties associated with each of those options. Indeed, the lack of demonstrable need for any of these options gives rise to serious doubts about the EU's competence under the Treaty to pursue any of them; and
  • the UK is aware, however, that the Commission has made public statements to the effect that it favours and intends to pursue Option 4 (a Regulation setting up an Optional Instrument of European Contract Law). That position, if it is accurate, seems premature given the paucity of evidence of a problem and the lack of any clarity or detail as to what substance such a Regulation might actually contain. In light of the Commission's position, the UK offers some detailed observations on this option and in particular flags some of the issues that would need to be confronted and overcome if it was to be pursued. It is considered crucial than any attempt to pursue this option further is preceded by a rigorous Impact Assessment and a full consultation on the proposed content of any new instrument.

4.12 A full copy of the Government's response is appended to this Report.


4.13 We are grateful to the Minister for writing and enclosing the Government's response to the Green Paper. We fully support the stance taken by the Government, informed as it is by the responses received to its consultation: there is no evidence to suggest that a common European Contract law is necessary for the proper functioning of the single market. Additionally, we think such a law could infringe the principle of subsidiarity. We will watch closely how the Commission decides to proceed from here.

4.14 Given the legal and political importance of the Green Paper, we recommend it for debate in European Committee B.

22   OJ No. L 177, 17.06.08, pp. 6-16. Back

23   See headnote. Back

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Prepared 7 April 2011