European Contract Law for
Consumers and Businesses

The Committee consisted of the following Members:

Chair: †Mr Charles Walker 

† Bagshawe, Ms Louise (Corby) (Con) 

† Brake, Tom (Carshalton and Wallington) (LD) 

† Djanogly, Mr Jonathan (Parliamentary Under-Secretary of State for Justice)  

† Duddridge, James (Lord Commissioner of Her Majesty's Treasury)  

† Flello, Robert (Stoke-on-Trent South) (Lab) 

† Gummer, Ben (Ipswich) (Con) 

† Harris, Rebecca (Castle Point) (Con) 

† Hopkins, Kelvin (Luton North) (Lab) 

† Reynolds, Jonathan (Stalybridge and Hyde) (Lab/Co-op) 

Roy, Lindsay (Glenrothes) (Lab) 

Simpson, David (Upper Bann) (DUP) 

† Turner, Karl (Kingston upon Hull East) (Lab) 

† Wallace, Mr Ben (Wyre and Preston North) (Con) 

Sarah Thatcher, Alison Groves, Committee Clerk s

† attended the Committee

The following also attended, pursuant to Standing Order No. 119(6):

† Connarty, Michael (Linlithgow and East Falkirk) (Lab) 

European Committee B

Tuesday 24 May 2011  

[Mr Charles W alker in the Chair] 

European Contract Law for Consumers and Businesses 

2.30 pm 

The Chairman:  Does a member of the European Scrutiny Committee wish to make a brief explanatory statement about the decision to refer the relevant document to the Committee? 

Kelvin Hopkins (Luton North) (Lab):  Thank you. It is a pleasure to serve under your chairmanship for a second time, Mr. Walker. On this occasion, I am afraid that this statement is slightly longer than brief, but I hope that it will not be too long. 

It might be helpful to the Committee if I take a few minutes to explain the purpose of the green paper and the reasons why the European Scrutiny Committee recommended it for debate. 

The idea of a single European contract law is far from new; it has been under consideration in various EU forums since the early 1980s. More recently, the focus has been on the possibility of creating what is formally entitled a “common frame of reference”, but should be thought of as a “toolbox” of common principles and terminology to be used by the EU institutions when proposing or amending legislation in this field. The final draft of the common frame of reference was published by the Commission in 2009, and it is that document which forms the backdrop to the green paper. The green paper was published in July 2010. 

The central premise of the green paper is that the different national laws of contract in EU member states hamper the single market for businesses, particularly small and medium-sized enterprises. That is because of additional transactional costs, increased legal uncertainty and lack of consumer confidence. In the press release accompanying the green paper, Commissioner Reding boldly stated: 

“Only 8% of consumers buy online from another Member State. In addition, 61% of cross-border sales are rejected because traders refuse to serve the consumer’s country. This is largely due to regulatory barriers and legal uncertainty about the applicable rules…I want a Polish, German or Spanish consumer to feel as safe when doing business with an Italian, Finnish or French company online as when they are at home. And I want Europe’s small and medium-sized companies to offer their products and services to consumers in other countries without having to become experts in the national contract law systems of all other 26 EU countries.” 

The sentence which reads 

“this is largely due to regulatory barriers and legal uncertainty” 

presumes a great deal, but it is not supported by evidence in the green paper. 

The green paper proposes seven alternative policy options for consultation, with a deadline for responses of the end of January 2011. The options are both legislative and non-legislative, and include using the draft common frame of reference as a toolbox; drafting

an optional European contract law, which could be chosen freely by consumers and businesses in their contractual relations; harmonisation of national contract laws by means of a directive; and full harmonisation of national contract laws by means of an EU regulation. 

In his explanatory memorandum in July last year, Lord McNally, the Minister of State for Justice, said he had concerns about the lack of evidence to support some of the assertions within the green paper. He said that it would be crucial to establish sound evidence to support any changes in this matter. He also pointed out that the policy options of a legally binding instrument marked a significant departure from the EU’s earlier approach to this question, which had focused on non-legislative measures. He said that any move beyond this would be a significant shift from the position established in the recently agreed Stockholm programme. The Government therefore decided to undertake a thorough public consultation, seeking views on each of the Commission’s options. The consultation would also test the premise that the current divergence of national law caused difficulties or acted as a hindrance to the internal market. The Minister 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.” 

The European Scrutiny Committee’s view of the option of harmonised European contract law was that of our predecessors, and the Government: that contract law is a matter best left to member states to determine. We also thought that a proposal for a legally binding European contract law might well raise subsidiarity concerns, which national Parliaments in the EU now play a role in monitoring; so we agreed with all the Minister’s concerns and asked to be provided with a summary of the results of the consultation exercise. 

In March this year, the Minister duly wrote with a summary of the results and attached the UK’s response to the green paper. The results showed that most respondents considered that 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”, 

which the Minister said the Commission had now openly said it favoured. Equally, significant, many of the interest groups consulted considered the choice of contract law of “little relative importance” in deciding whether to trade across a particular national border. Other factors were cited as being “far more important”, such as language, currency, shipping costs, local taxation schemes, brand familiarity, concern about redress, payment security and after-sales service. That had led the UK to recommend non-legislative options in its response to the green paper. 

In recommending the green paper for debate, the Committee wanted that debate to focus on two things. First, there is a sense from reading the papers that the Commission had already made up its mind before ever analysing the responses to its consultation. Given the consultation deadline of the end of January 2011, we were surprised to discover in preparing for this debate that the Commission’s work programme for 2011, which was published in October 2010—so during the consultation period—contains the following commitment: 

“As part of its efforts at strengthening citizens’ rights in 2011, the Commission will propose a legal instrument on European Contract Law”. 

Indeed, the annexe to the work programme confirms: 

“This initiative constitutes the follow-up to the 2010 Green Paper”. 

We would like to know what the Minister thinks the purpose of the green paper was, given that by October 2010 the outcome, so far as the Commission was concerned, was a fait accompli. We would also like to know whether he thinks that the Commission’s practice is consistent with the “Better Regulation” principles, which require it to consult widely before deciding whether legislation is appropriate. 

Secondly, we would like the Minister to update us on whether the Commission will indeed bring forward a proposal on an optional European contract law. If it does, and bearing in mind the impact such a proposal could have on national law, we would like to know whether the Government will consider opting in; whether they will consider challenging it on grounds of insufficient evidence, of lack of competence or of subsidiarity; or whether they will simply seek to attenuate the effect of any proposal in negotiations, as is hinted at in their response to the green paper. 

The Chair:  Thank you very much, Mr Hopkins. I call the Minister to make an opening statement. 

2.37 pm 

The Parliamentary Under-Secretary of State for Justice (Mr Jonathan Djanogly):  I am very pleased to be serving under your chairmanship this afternoon, Mr Walker. I admire the level of participation here today, given that many Members are probably moving towards the recess. I am very pleased to see that this Committee remains in place to safeguard our interest in Europe. 

If I may, I will start by making some general contextual comments of my own. I am pleased that the Committee has called this debate. This is an important matter and one that I know is of significant interest to Parliament and the wider public. The first thing to say about this project—if I may call it that—is that it has had a long history. The Commission and the Council have been engaged in the general issue of contract law for a decade or so, and I believe that the European Parliament’s involvement stretches back much further than that. The main focus of the project has been to try to improve the quality and coherence of EU law relating to contracts. The project, led by the European Commission and directed by the Council, has been to regularise and thereby improve the drafting of the current and any future laws in relation to contracts. 

That led to the idea of creating what has become known as the common frame of reference or CFR. The CFR would be what some have called a “legislator’s toolbox”, which would draw together the most common concepts and terms used in contract law and would be the commonly agreed basis for use by the authors of any future EU laws relating to contract law. The aim is to reduce or remove the current differences and the difficulties those cause. This Government, and I believe also the previous Government, supported this work and we continue to do so. This may seem a fairly limited ambition, but it has the potential to improve the current situation and is I think widely agreed to be a good thing to do. 

I turn now to more recent events. The European Commission published a green paper in July 2010 inviting views on how to take this project forward in the future. That set out various options for possible reform, including continuing with the development of the CFR. It invited views on a range of possibilities, including a specific directive and a regulation providing an optional EU-level regime, as well as other options, right through to a mandatory black letter European code of contract law. 

It was clear, even from the green paper, that some options were included for the sake of completeness rather than because they were truly credible. The option for a mandatory European code of contract law was one option that was clearly not considered to be a realistic possibility. 

In reality, the green paper and the debate that has followed it have largely centred on two main options for how to proceed: continuing more or less with the current project plan and developing the CFR; or creating a new regulation to establish an EU-level regime of contract law that parties to a contract might choose to use instead of any particular national law. This has become known as the “optional instrument” idea, and I am sure that we shall talk about it further today. 

The Ministry of Justice issued a UK-wide call for evidence to help inform the Government’s response to the Commission, which was made in February this year. Copies of the response are in Members’ document packs, and I will not rehearse the detail now because I am sure that the response will be discussed later—I shall be happy to answer questions about it. 

In a nutshell, the Government’s response indicated support for the continuation of the development of a CFR legislator’s toolbox and the publication of the work of the Commission’s expert group. However, it did not support any of the other options, primarily because there has been no reliable evidence of need that suggests that any of them would be a proportionate response to the issue. 

The green paper gave no clue as to what the actual content of any of the other options might be; perhaps consequently, nor did it give any evidence or assessment of the impacts. It is clear, however, there would be impacts, and such evidence will be crucial before any decision on legislation can be taken. 

I might add that this is of particular interest to the UK, given our position as a global leader in international contractual trade based on our common law. Such commercial pre-eminence is important to the UK economy, and indeed the EU’s. Any reform that could affect that should therefore be approached with caution and we should move ahead only on the basis of solid evidence. Our response attempted to make that point clear. 

The Government’s response also offered specific comment on the idea of an optional instrument, because it was clear that that was the other main option on the table. Members will see that the response stresses that there needs to be a proper assessment of impacts before that can be properly considered. It also raises other issues that would need to be satisfactorily resolved before we could support that proposal. 

The Ministry of Justice and the Department for Business, Innovation and Skills recently jointly commissioned the Law Commissions of England and Wales, and of Scotland, to produce advice on the possible

impacts of an optional instrument. They will also be looking at the recently published feasibility study from the so-called expert group that has been tasked by the European Commission to look into the idea. We are also looking at the feasibility study, but we have not yet taken a view on it. 

The Commission has received our response and those from others, including more than 40 from UK interests and experts. It is considering what, if anything, should be done next. We await a proposal from the Commission. 

I am grateful for the chance to hear Members’ views at first hand. Those views will guide us as the project develops, and I hope that all members of the Committee will find it easy to support the motion that we shall consider later. 

The Chair:  We have until 3.30 pm for questions to the Minister. I remind Members that questions should be brief. Subject to my discretion, it is open to a Member to ask related supplementary questions. 

Robert Flello (Stoke-on-Trent South) (Lab):  It is a pleasure to serve under your chairmanship for the first time, Mr Walker. I wish to ask the Minister about 10 questions; would you prefer me to put them in batches or individually? 

The Chair:  Batches of three. 

Robert Flello:  That would be perfect. 

The Chair:  Or four. 

Robert Flello:  I am most grateful. 

As ever, I am delighted that the Minister is present, and I hope that my first question to him will elicit a simple yes-no response, although I know that such a thing is difficult. To put it simply, do the Government agree with the European Commission that the problem is sufficient that it requires some form of intervention? Secondly, have the UK Government carried out any kind of impact assessment—a major assessment or a back of an envelope-type exercise—given that none has been completed by the European Commission? If so, what are the implications? What discussions has the Ministry of Justice had with the UK Federation of Small Businesses, whose estimate of legal advice costing €15,000 was cited by the European Commission as one of the reasons for needing to harmonise contract law? Does the Ministry of Justice agree with that figure? 

Mr Djanogly:  Do we think there is a sufficient problem? No, not necessarily. The toolbox is a useful concept to put in place in relation to general contract law for the future, but we have yet to see empirical evidence to suggest that there needs to be any development in that regard. It is true that no impact assessment has been made, but we believe the Commission will produce one. Of course, as we develop our own policy on this matter, that will be looked at carefully as well. 

Although many businesses and their representative organisations were strongly opposed to any action beyond a legislator’s toolbox, some UK business organisations have expressed support for an optional instrument,

although this support is dependent on the content of any proposal from the Commission. The Government will take account of their views when we consider our response to any Commission proposal. 

Robert Flello:  What discussions has the Minister had with the UK Federation of Small Businesses on the €15,000 figure the Commission cited? Has the Ministry of Justice estimated the additional costs of training legal practitioners, and the additional judicial costs if the Commission’s preferred instrument is adopted? Why does the Ministry of Justice believe that it should support options 1 and/or 2a instead of rejecting the entire set of options? 

Mr Djanogly:  We are aware of some support from the UK Federation of Small Businesses and the British Retail Consortium, but I think it was for the idea of an optional instrument being developed further and was based on various assumptions. The need first for analysis of impacts was also noted. We have not looked at the costs to the judiciary, mainly because we are nowhere near reaching the stage of understanding the assumptions necessary to appreciate the costs. Broadly speaking, the Government’s position—it is set out in our response to the Commission—is that we support options 1 and 2a of the green paper, which are publication of the expert group’s work and the development of a common frame of reference for use by the Commission. We do not support any of the other options identified, as we have seen no reliable evidence to support the case that they are necessary or proportionate; nor have we seen any impact assessments to inform a decision to legislate. 

The Government believe that it was vital to consider the problems that the green paper aimed to resolve, before considering the options it proposed for resolving them. In broad terms, the Commission stated that the current divergence in the national contract laws of member states deterred parties from trading across borders, thereby interfering with the proper function of the financial market. The green paper, however, offered little by way of evidence to support these assertions. Indeed, the surveys quoted fell a long way short of demonstrating the problems stated. In addition to the questions posed in the green paper, the Government asked UK interest groups whether there was any evidence to suggest that contract law posed problems in cross-border business consumer transactions. The view of the majority of the respondents to the UK-wide evidence-gathering exercise concluded that there was no substantial or compelling evidence that there was a problem with contract law in cross-border transactions, and questioned whether there was a justifiable need for any of the legislative options proposed. As a result, the Government concluded that there did not appear to be any problem stemming from the current divergence in national contract laws, nor any resultant effect on the proper functioning of the internal market that would justify any of the legislative approaches set out in the Commission’s green paper. 

As a result, the Government concluded that no evidential base had been made that provided a mandate for any of the legislative options proposed. 

The Chair:  Mr Flello, your final flourish. 

Robert Flello:  I am grateful, Mr Walker, although sadly I think the Minister’s answers have raised a few further questions in my mind, if I may ask your indulgence on that. 

The Chair:  We will come back to you. 

Robert Flello:  Indeed. For my final flourish, then, what discussions has the Ministry of Justice had with the European Commission about its stated intention to pursue option 4? Does the Ministry believe that the official toolbox, option 2a, would provide greater clarity or yet another level of complexity? Does the Ministry believe that if the European Commission does propose option 4, it should apply both to business-to-business and business-to-consumer contracts, and cover domestic as well as cross-border contracts? What discussions has the Ministry had with other Departments and other bodies to consider the barriers to cross-border transactions that are actually considered significant by businesses and customers? 

Mr Djanogly:  The question on cross-border transactions and, indeed, many of the hon. Gentleman’s other questions are better put to BIS than to the Ministry of Justice. The Ministry has proposed seven main options for ways to reform the green paper. They address the view taken in the green paper that the current divergence in national contract laws is a hindrance to the proper functioning of the internal market. The options range from simply publishing the work that the expert group has done so far, continuing with the current plan to develop a common frame of reference, through to the establishment of a mandatory European code of contract law. In between, there are suggestions for an optional instrument of some kind. The green paper also discusses what kind of contracts might be in or out of scope. It does not, however, discuss the content of any of the options in any detail, but rather asks what form any proposals should take. 

The hon. Gentleman asks how far the Commission has gone in relation to option 4. It is important to make it clear that it has not moved ahead on that proposal. It is looking at the replies to consultations and will be taking a view. 

I think I have missed one of the hon. Gentleman’s questions. Perhaps he would care to remind me of it. 

Robert Flello:  I am not sure. I will return to it if need be. 

Tom Brake (Carshalton and Wallington) (LD):  It is a pleasure to serve under your chairmanship today, Mr Walker. Members will be pleased to hear that I am not going to ask the Minister 10 questions, but will restrict myself to just one, so my flourish will have a very short half-life. 

I seek reassurance that all views will be taken into account. The Minister may be familiar with Flash Eurobarometer 224, which sounds as though it may be related to the Eurovision song contest, but is actually a survey about business attitudes towards cross-border sales and consumer protection. In that survey, which I accept the Minister may say is more appropriately a matter for BIS, 46% of retailers agreed that if the

provision of laws regulating consumer transactions was harmonised throughout the Union, cross-border sales would increase. They went on to say that more of them would be likely to seek cross-border sales if there were further harmonisation. I know that the Minister will have had a variety of views from different sources about whether this is a good or a bad idea, but I hope the views I have mentioned will also be taken into account. 

Mr Djanogly:  Of course we support the idea of a common language; that is generally supported. There will be moves in that direction. My hon. Friend makes an important point about barriers to cross-border trade, which need to be dealt with. We agree that divergent consumer protection laws act as a barrier to cross-border business and to consumer trade, which is why we support the greater harmonisation of consumer laws through the consumer rights directive, which is being negotiated by BIS rather than the MOJ. However, evidence shows that divergent consumer laws are just one of the barriers to increasing cross-border trade. Others include language barriers, different currencies, delivery issues and other areas of law. Although there is evidence that divergent consumer laws are one of the barriers, we do not think that the scale of the problem at this stage justifies the optional instrument approach. 

Robert Flello:  I want some clarification on a few of the Minister’s responses. I have not quite understood—forgive me if he thinks he has explained this—why he thinks that the toolbox is useful, so will he tell us what more it will add? 

The Federation of Small Businesses was cited by the European Commission. Has the Minister been in touch with the federation about that fact? Has there been any dialogue at all? 

I agree with the Minister that most of the barriers to cross-border trade are properly the role of BIS, but has he spoken to BIS Ministers about this? Finally, I am not sure whether he has held discussions with the European Commission about option 4. 

Mr Djanogly:  The Government have been in constant discussions, and it is important to say that this has been a 10-year process, so there is nothing speedy about what has been going on. Discussions have been held at different levels over a long period, including with the involvement of the previous Government. This Government believe that the best steps are options 1 and 2a, which more or less continue towards the delivery of the existing project aims. The publication of the expert group work—option 1—and the creation of an official toolbox might help to reduce problems resulting from the divergence of national laws by promoting a wider understanding of any differences and reducing their impact. That view is broadly in line with the established position adopted by the Council. Given the responses received following the call for evidence, the Government concluded that the Commission had provided no evidential base that provided a mandate for any of the options in the green paper beyond those in options 1 and 2. I can confirm that I have been in contact with BIS because, as the hon. Gentleman will appreciate, this matter is tied in with consumer law and the two must go hand in hand. 

The Chair:  If no more Members wish to ask questions, we will proceed to debate the motion. 

Motion made, and Question proposed,  

That the Committee takes note of European Union Document No. 11961/10, a Green Paper from the European Commission on policy options for progress towards a European Contract Law for consumers and businesses; supports the Government’s response to the Green Paper, sent to the European Commission on 10 February 2011; and agrees with the terms of that response.—(Mr Djanogly.)  

2.59 pm 

Robert Flello:  May I add my thanks to my hon. Friend the Member for Luton North for the way in which he started our proceedings? I also thank the Law Society and Which?, the consumer organisation, for their briefings, which have helped me as I have waded through the paperwork. 

Overall, the Opposition agree with the Government’s submission. Their response to the green paper includes three summary points, the first of which says: 

“The UK considers there is no reliable evidence available”— 

we agree. No reliable evidence has been made available to the Opposition, and we have not seen anything that would convince us otherwise, so we agree that the Government are right to push this matter back to the European Commission. 

The Government’s response also states: 

“The UK considers there is no demonstrable need established for any of the options beyond options 1 and 2a.” 

I have not heard anything during this sitting or seen anything in the bundle that makes me want to rush to embrace options 1 and 2a, but for the sake of moving the debate on, we will leave that in abeyance and see what comes out of the process. 

The second summary item in the response specifically states: 

“None of the other options…are considered necessary or proportionate…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.” 

Again, we agree that the Commission’s pursuit of these additional options is a little concerning. If it is correct that the Commission has made public statements to the effect that it favours and intends to pursue option 4, we would be extremely concerned and would not welcome that at all. 

We are concerned that this exercise on the Commission’s part—the green paper, the whole push of things—is a way of trying to get option 4 through and on to the table, instead of doing what it should be doing, which is getting on with putting together the toolbox. We therefore urge the Minister to go back to the Commission in the strongest terms, in order to get it back on track. 

Overall, we agree with the European Scrutiny Committee’s list of issues that are the real barriers to cross-border trade, as very helpfully read into the record by my hon. Friend the Member for Luton North. 

I do not wish to detain the Committee further, other than to repeat that we hope the Minister and the Government can go back into the fray with the European Commission and take the strongest line with it. Although we welcome any move that genuinely helps and promotes British business, and makes sure that it and British consumers can work and engage effectively across the

Union for the betterment of us all, we do not want that to be used as an excuse for an unnecessary and potentially harmful development, with a 29th set of rules coming on to the table. 

The Chair:  The debate may continue until 4.45 pm before I must call the Minister. Are there any colleagues on the Back Benches who would like to speak? 

3.2 pm 

Ben Gummer (Ipswich) (Con):  I would like to flag up one issue that the Minister raised: this country’s law industry. I speak as someone with no particular interest—I am not a lawyer and have no desire to be. The City of London has some of the biggest law firms in the world, and they are one of our largest and most visible exports. They are not just an export in themselves—they are one of the reasons why the City of London is so attractive to international finance business. Will the Minister comment on the submissions made by representatives of the legal industry and their position on the Commission’s proposal? 

The Chair:  I call the Minister. May I remind him that this Committee ends at 5 o’clock? 

3.3 pm 

Mr Djanogly:  I can assure you, Mr Walker, that I will do my absolute best not to delay Members until 5 o’clock. 

To answer the last question first, we have received a helpful briefing from the Law Society only today, so I can tell my hon. Friend the Member for Ipswich that the position the society takes essentially reflects that taken by the Government. As I said in my opening remarks, the Government keep the position of British business and the British legal community, being a section of the business community, at the forefront of our minds and that will certainly remain the case. 

I am grateful for the views expressed and the questions raised here today. The hon. Members for Stoke-on-Trent South, for Carshalton and Wallington and for Luton North all made excellent contributions. I have taken careful note of all the points raised and will use them as a guide to our work on the next possible phase of this project, which we have discussed today. I cannot tell the Committee today what the exact details of that phase may be, and we await the Commission’s own proposals. However, I hope the Government’s earlier response and the comments I have been able to make today show Members how we plan to approach the next stage, whatever and whenever that may be. I know that our general approach has been supported by the Scrutiny Committees of both Houses, and I hope that, in a moment or two, this Committee will confirm that support. 

I can assure Members that we will look to ensure that any progress is made only on the basis of good evidence of need and robust analysis of impacts. We will also want to ensure that any response is proportionate and complies with the principle of subsidiarity—a point that the Commons European Scrutiny Committee has already flagged up—and not least to ensure that the treaty base is appropriate for the measures proposed. 

The hon. Member for Stoke-on-Trent South spoke robustly against option 4, and I can reiterate that the UK fought hard to exclude a reference to an optional

instrument in the Stockholm programme. Our views on the political CFR have not changed—the UK remains opposed to any notion that the draft common frame of reference, published by the Commission’s group of academics, is meant to be a foundation for creating a European contract law. The Council has reiterated in several communications that the CFR should go no further than a toolbox, and this was confirmed in the Stockholm programme. As for the optional instrument, the UK is yet to be persuaded that the need for one exists. We will seek to work with all those most affected by any change as we move forward on this project, and I hope and expect that we will receive no little support from Governments in other member states and from the European Parliament. Of course, we will work with Members of this House and the other place, in particular the Scrutiny Committees, in taking forward this work. 

I conclude by asking for the Committee’s support for this motion. 

Question put and agreed to.  

3.6 pm 

Committee rose.