European Scrutiny Committee Contents

Annex: UK Government response to a Green Paper from the European Commission on policy options for progress towards a European contract law for consumers and business


1. The UK Government (hereafter "the UK") welcomes the opportunity to respond to the European Commission's Green Paper of July 2010. It has conducted its own extensive evidence-gathering exercise to inform this response. The UK has also had the benefit of meetings with the Commission on this topic at various levels. The main findings, conclusions and recommendations of the UK are set out below. The UK is happy to expand or explain any point if that would be helpful.


2. 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.

3. 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.

4. 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.



5. Before turning to any of the options for change identified in the Green Paper the UK considers it vital to look first at the problem these options are proposed to resolve. The Green Paper sets out the issues it is attempting to resolve through the identified options in its Section 1. In very broad terms this suggests that the current divergence in national contract laws may deter some parties from trading across borders which therefore interferes with the fullest functioning of the internal market. The Green Paper offers little by way of evidence to support these assertions. The Euro-barometer and the Clifford Chance surveys cited in the Green Paper are not wholly convincing for a variety of reasons and fall a long way short of reliably demonstrating the problem stated. Other surveys might even suggest different conclusions.

6. The UK particularly sought evidence on this point during its own call for evidence but found little was forthcoming in response. It was the overwhelming view of respondents that there was no compelling evidence of a problem or of a need for any of the legislative options in the Green Paper. The UK therefore concludes that at this point in time there is no convincing evidence (in the Green Paper or revealed since) of a significant problem stemming from the current divergence in national contract law, nor of any actual hindrance to the proper functioning of the internal market due to any differences in national law.

7. On the contrary, there is evidence that points to the market operating very effectively indeed. This is an area of law where party autonomy is well established and parties to contracts have and do commonly exercise a choice of the most appropriate law for their own circumstances in their commercial transactions.

8. Many of the interest groups consulted in the UK considered the choice of contract law of little relative importance in determining whether to trade across borders or a particular national border. Most of these cited others issues as far more important in making that decision. These issues included language, currency, shipping costs, local taxation schemes, brand familiarity, concern about/lack of understanding of redress and enforcement measures, security for payment, after sales service etc. Those selecting a law for use say they do so for an equally varied mix of reasons, including the speed of the resolution processes and the legal certainty of that system.

9. Action to resolve demonstrated issues should be proportionate to the problem. A legislative response does not seem justified on the available evidence and other practical responses may be worthy of fuller consideration. For example, if a more significant problem with operating under a different contract law is of not understanding the content of that law due to it being in a foreign language then a more appropriate and effective answer might be action to improve the availability of that information in other languages. One practical approach suggested in the UK evidence-gathering exercise was to provide model contracts in different languages and/or in specific areas of business. All these options and others may be more effective in practice than the legislative approaches canvassed in the Green Paper.

10. The UK concludes, therefore, that no evidential case has been made that provides a mandate for any of the options beyond options 1 and 2. None of the other options seems a proportionate response given this background. The UK considers options 1 and 2a, which more or less continue toward the delivery of the existing project aims, are the best next steps in this project. The publication of the results of the Expert Group (option 1) and the creation of an official "toolbox" for the legislator (option 2a) might help reduce any problems resulting from divergence in national laws by promoting wider understanding of any differences and reducing any impact those have. This was the position favoured by the majority of respondents to the UK domestic call for evidence.

11. The UK does not support any of the other options in the paper (3-7) Although the Green Paper did not describe the likely form or content of such measures in any detail (and it is notable that the Green Paper questioned whether certain of them would comply with the proportionality and subsidiarity principles), there is no adequate evidence of need for measures of this kind. If there is to be any further work on any of these options it is essential that the first phase is to establish clearly the need and the exact problem any EU-level response is aimed at remedying. A full and rigorous Impact Assessment would be a pre-requisite next step.

12. The Commission appears, however, to have made no secret, even during the consultation period, that it already favours option 4 — a Regulation for an Optional Instrument on European Contract Law. The UK notes this with some concern, since, if it is true, it suggests that important policy decisions have been taken in the absence of adequate evidence and before the views of consultees are known.

13. A difficulty with assessing the value or otherwise of such an approach is in assessing the content of a proposal which has yet to be made. The green paper is understandably short on this level of detail. Nonetheless, if Option 4 is to be pursued, it is imperative that there should be an opportunity for public consultation on the possible content of the instrument, supported by an Impact Assessment. Within the UK, this would also allow an opportunity for stakeholders who might be ready to support such a proposal in principle to make a fuller assessment.



14. A number of our consultees noted during meetings arranged at the Ministry of Justice that, given the impetus for action is supposed problems arising as a result of the multiplicity and divergence of law providing yet another, different, law is counterintuitive and bizarre. It has not been established that the new law would be in any way superior to long-established national laws or that providing such a law would deliver any greater benefit than at present.

15. It may be difficult to quantify but it is clear that a 29th regime would "belong to no one in particular" and would not reflect any particular legal or cultural heritage. Indeed a fundamental first question for the authors of such an instrument might be whether to base it more on the common law perspective, which is currently probably the most commercially attractive approach, or the civil law position, which may be more familiar to EU citizens. The „Esperanto? approach must at least raise the possibility that it will feel comfortable and familiar to no one and consequently will be rarely used.


16. Legislation is not cost or risk free. It will inevitably be controversial, and involve difficult and a lengthy and intensive negotiation process (witness the closely related Consumer Rights Directive). A good deal of time and money has been spent on this project already and more of both will be needed simply to deliver options 1 and 2a.

17. The UK is aware that the Commission believes the optional instrument will save money for trading partners. There is as yet no evidence of this shown, and some UK interest groups consulted were unconvinced by this claim. On the contrary, there was some concern that, once finalised, the legislation will lead to additional costs. Trading parties will need to be aware of its content to make an informed choice about whether to use it. Judges will need to be trained throughout Europe. Legal advisors will need to be able to advise on the relative pros and cons and courts will need to be able to determine cases brought under the new law as well as all others currently handled. If consumers are to play a part in deciding whether to opt to use the new law they would also need help to make informed choices, even if it is to choose not to use it. Enabling all of these will incur costs which need to be quantified as part of the policy development and impact assessment process in order to demonstrate beyond doubt that they are not disproportionate to the benefit claimed.

18. A new contract law will not be totally benign in the sense it will have some effect on the use of other laws. That impact may have consequences, including micro and macro financial consequences. Parties to a contract currently have party autonomy and this freedom of contract is an important principle. Most will currently select their own law or English law which is commonly preferred. That means that if any new optional law was successful it would have some impact on the current commercial pre-eminence of English law. That may have an impact on existing legal practice and dispute resolution mechanisms in the UK all of which would need to be assessed before any decisions are taken. The English common law is the favoured choice of global (and inter-EU) commercial contract law. It should be borne in mind that if EU legislation somehow unsettled the current commercial position of the English common law then any business the UK lost would most likely not be displaced elsewhere in the European Union but rather would be more likely go to a non-EU common law jurisdictions such as New York, Switzerland and Singapore. This reality needs to be reflected in the Impact Assessment as impacts may not be equal throughout the Community.


19. An important issue any proposal would need to address is how the new instrument interacts with national laws. Contract is a very wide area and disputes can sometimes stray into unforeseen areas (e.g. tort). It would seem impossible for any new legislative instrument to cover all possible areas of potential dispute and any attempt to do so would be a long and probably ultimately unsuccessful exercise. It would seem likely, therefore, that any instrument would have to revert the dispute/issue to national law at some point. That would mean there would need to be a rule to govern this (perhaps something analogous to Article 6 of the Rome I Regulation). Given this, it must be noted that any party using the optional instrument might still be required to use a national law and might need to establish the requirements of that before using the optional instrument. This would reduce the attractiveness of the optional instrument and increase the costs associated with using it.


20. It is not clear how any new additional/optional law for contract would relate to other EU legislation in closely related areas. In particular the relationship with Rome I (ref), the Consumer Rights Directive (CRD) (ref) and the Digital Agenda needs to be considered. Any additional legislative action on contract law should complement extant and anticipated legislation. This has implications at least for the timing but possibly also the scope of any additional work on new contract laws. If, for example, any new contract law Regulation were to cover consumer transactions it would have to be consistent with the outcome of the Consumer Rights Directive, which suggests it should follow the conclusion of that. On the Digital Agenda, the interaction will depend on the scope chosen for both projects which can only sensibly follow the more precise definition of the problem to be resolved by this project which is discussed elsewhere in this response. The Green Paper says any further action proposed would be "by 2012" which is a short timescale given the complexities to be overcome. Yet the UK is aware the Commission has made statements recently suggesting a legislative proposal might be produced even sooner. It is far from clear that such a short timescale is necessary or desirable. Indeed, it would almost certainly be undesirable given the clear need for more evidence to be gathered and analysed and a further round of consultations need on the possible content of any proposal. The UK is aware that even some of those that have supported the principle of an optional instrument have asked to be consulted again on its content.

21. On Rome I, the issue will particularly concern the continued application of Article 6, the underlying policy of which provides protection and certainty for consumers through reference to the mandatory rules of national laws. It seems likely that Rome I would need amendment of some kind to accommodate any new Regulation.


22. The Green Paper does not discuss the possible legal base for Option 4. The UK appreciates it might be difficult for the Green Paper to give such an indication without further consideration of the detailed content of any of the options. Yet it is crucial that there is an appropriate legal base.

23. The UK is aware that the Commission has said it is considering alternative legal bases, and indicated that which is appropriate might depend upon decisions on content. It is understood the bases being looked at include Article 81, Art 114 or Art 352 or some mix of these. It is far from clear how these might be justified and whether they will withstand interrogation or challenge. It seems there must be a real risk of challenge given the context (the doubts over need and the [as yet unknown] terms of the legislative response) and this might come through preliminary rulings or even via the constitutional courts of some Member States. Clearly this is something the Commission and Council Legal Services will need to consider carefully. Any amendment of Rome I would seem likely to be based on Art 81 but whether that could be a basis for all the changes desired remains to be seen. For alternative Treaty bases it will clearly be crucial to satisfy the subsidiarity and proportionality tests and given the current lack of hard evidence of need for an optional instrument this may be a high hurdle indeed.

24. Clarity as to the legal base is essential, not least for the very practical reason that, if there is doubt about its legality, the instrument may not be used at all, at least until it is tested in the appropriate court and there is likely to be reluctance to be amongst the initial users needing to test this. It is evident from the UK evidence gathering exercise that there is doubt amongst interested parties about whether there was an appropriate Treaty Base for any harmonisation of contract law, even an optional one, and certainly none which would allow the replacement of national rules with EU rules. Just as importantly, interested parties are concerned that doubts as to the appropriateness of the legal base could lead to possible challenge before the Court of Justice, calling into question the validity of contracts made under the new law. The UK agrees and is concerned that this matter is considered fully and early in the process. The UK wishes to register the point that the lack of apparent evidence of need for an optional instrument will mean the proportionality of any legislative measure will be under particular scrutiny.

25. The Green Paper asks if the optional instrument might be open to parties to a purely domestic (non-Cross Border contract). The UK cannot see any appropriate legal base for such a proposition.


26. A practical concern raised several times during the UK call for evidence was that differences in interpretation would remain between different courts or equivalent bodies in different Member States at least at such time as a body of case law of the more common disputes had been established. There was some concern that the European Court of Justice, as currently constituted, would not be able to respond effectively to these new needs and that the delays in such judgments — possibly spanning years — might themselves mean the optional instrument would not be used. Until a body of jurisprudence was built up it is easy to see why there could be this reluctance. The UK agrees this must be a concern and a real risk. It may mean the proposed instrument was an ineffective measure for this reason alone. If the resolution of disputes was slower it would be a poor outcome indeed.


27. There are several other key matters that would need to be resolved, not least the material scope and scope of application of any proposal. These include:

—  The Commission seems to suggest the proposal is aimed primarily at SMEs but it is not clear if it would (or how it would) be restricted.

—  Should an optional instrument, for example, be limited to business-to-business transactions only, or extended to business-to-consumer, consumer-to-consumer or any grouping of these?

—  Should it cover on-line transactions (only or additionally) and might it be available for sales of goods or services or both? What else might be covered?

—  The term "optional instrument" is widely used — but optional for who?

28. The UK is aware that the Green Paper raised many of these issues as questions. The UK gathered some evidence on preferences of interested parties during this exercise but in the absence of any clear framework or shape of a proposal it inevitably produced an inconclusive picture. The UK considers a clearer vision of what might be proposed and a precisely defined and evidenced need would be necessary to direct a more meaningful and detailed consultation on any proposal.

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Prepared 7 April 2011