Memorandum by Clifford Chance
DRAFT EUROPEAN UNION CONSTITUTION
In its 35th Report on "The Future of Europe:
Progress Report on the Draft Constitutional Treaty and the IGC"
the House of Lords Select Committee on the European Union invited
evidence to be submitted in writing by 10 September.
I therefore attach a paper we have prepared
on two Articles of the Draft Constitution which have been causing
concern to us, and to others in the City of London. Our particular
concern, as the largest UK-based law firm, is that imprecise drafting
in these Articles could lead to unintended results including a
fettering of the basic freedom to contract.
We support the very good work the Committee
has been doing on the Draft Constitution up until now and trust
that the Committee will find these brief comments helpful.
Draft EU Constitution: a hostage to fortune?
On 18 July 2003 the Convention, led by M Giscard
d'Estaing, submitted the final text of the Draft EU Constitution
(CONV 850/03) to the President of the European Council in Rome.
The Member State governments will have the opportunity to propose
and negotiate amendments to the Draft during the Intergovernmental
Conference due to begin in October. There is political pressure
on governments to keep proposed amendments to a minimum. It is
vital, however, that the EU's Constitution, which allocates competencies
between the EU institutions and Member State governments and provides
legal authority for legislation that will affect the whole of
the EU, is clearly drafted. There are two Articles in particular
which are giving rise to some concern; in both cases this concern
could be resolved by greater clarity in the drafting.
The Union shall develop judicial cooperation
in civil matters having cross-border implications, based on the
principle of mutual recognition of judgments and decisions in
extrajudicial cases. Such cooperation may include the adoption
of measures for the approximation of the laws and regulations
of the Member States.
In the second sentence, the power to approximate
the laws of the Member States is limited, and linked, to the subject
matter of the Section title ("Judicial Cooperation in Civil
Matters") only by the first word "Such". This relates
it directly to "judicial cooperation in civil matters etc".
This, however, is also imprecise. Could it cover
any civil law? Arguably it could, since the approximation of substantive
law undeniably would assist in the mutual recognition of judgments.
What are extra judicial cases? Do they include all arbitration
and ADR decisions? What of decisions by regulators such as the
Financial Services Authority, or Ofgem, of planning decisions?
We believe that the authority provided by this
Article should clearly refer to matters involving civil procedure,
not substantive law. It is true that the predecessors of this
Article (Articles 61 et seq of the EU Treaty as amended
by the Nice Treaty) were the legal basis for Rome I, which changed
substantive law in the Member States. But the law in question
was that of civil procedure relating directly to the recognition
of judgments which is the proper subject of the Articles, not
underlying substantive law: this should not therefore, set a precedent.
As currently drafted, this Article could be
proposed as a legal basis for the approximation of the law of
contract, defamation and any other civil law. We do not believe
that this is the intention of the Member States. A further concern
is that the previous Articles (ibid) required unanimity
for proposals under this section (at least for a transitional
five-year period) whereas laws under the new draft would require
only a qualified majority. A simple drafting amendment would resolve
the uncertainty. We would suggest adding the following words to
the end of the second sentence
"in the areas referred to in paragraph 2
and in so far as necessary for the proper functioning of the internal
If Article III-170 is intended only to authorise
cooperation measures in the field of judicial procedure, there
can be no objection to such a clarificatory amendment. If however,
it is intended to authorise other, more substantive approximation
measures, this should be clearly spelt out under a separate Section
Harmonising contract law
The European Commission has produced a Communication
containing an Action Plan on the harmonisation of contract law
("A More Coherent European Contract Law", COM (2203)
68 final), which puts forward four options ranging from leaving
the solution of identified problems to the market to full harmonisation
of contract law (Option IV). In the responses published on the
Europa website so far, there seems limited appetite for Option
IV. The German Lander, the Polish government and the Austrian
government have all queried whether there was an existing legal
basis for Option IV. Others, including the FSA and the Danish
government, suggested that Option IV might not accord with the
principles of proportionality and subsidiarity. The UK government
was strongly opposed to Option IV.
If a legal basis for harmonisation of contract
law does not currently exist, it would surely be improper to create
a legal basis by the back door, as it were, of an Article on judicial
cooperation in civil matters.
This is not the proper place for an extended
argument in defence of English common law, the freely chosen law
of many international contracts. It should however, be pointed
out that the system of English common law has been a large contributory
factor in the success of the City of London as a financial services
centre. A number of academic studies and articles
have shown causal links between common law jurisdictions and the
development of strong capital markets. If, in a worst-case scenario,
an EU-wide civil contract law replaced the current contract laws
of the Member States, this could lead to a loss in the UK share
of world financial markets and a consequent detrimental effect
on the status of London as a financial centre. Much of this activity
could be moved outside the EU. The Corporation of London has estimated
that, without the success of the City of London, the EU would
lose £34 billion of global finance business.
The harmonisation of contract law would damage,
therefore, not just the City of London, but also the EU as a whole.
"In establishing an internal market, measures
for the introduction of European instruments to provide uniform
intellectual-property rights protection throughout the Union and
for the setting up of centralised Union-wide authorisation, coordination
and supervision arrangements shall be established in European
laws or framework laws."
Like Article III-170, this Article is loosely
drafted and could, potentially, provide a legal basis for matters
unrelated to intellectual property, its proper content. In this
Article there is no form of linking or limiting word in the second
part of the sentence, which authorises the establishment of Union-wide
authorisation and supervision arrangements. While this is clearly
intended to relate only to the supervision of intellectual property
rights, its legislative effect could be much wider. Without limiting
words, it could be proposed as a legal base for the establishment
of an EU financial services regulator, or an EU supranational
Assuming that it is not the intention of this
Article to provide carte blanche for the establishment
of EU-wide regulators in any sector, there can be no objection
to a clarificatory amendment limiting the effect of the second
part of the sentence, to the authorisation and supervision of
intellectual property rights. It is, however, important that the
legislative effect of the Article be clarified.
We suggest that failing to deal with these issues
now, when it is still a relatively simple matter to make the necessary
amendments, would be leaving hostages to fortune in the form of
ambiguously worded Articles which have the capacity to be misused
at some time in the future. Once the Constitution is in force,
the procedure for changing it becomes vastly more difficult.
10 September 2003
1 What works in Securities Laws? La Porta,
Lopez-de-Silanes and Shleifer, Harvard University and Yale University,
16 July 2003. The Common Law and Economic Growth: Hayek Might
be Right, Paul Mahoney, University of Virginia Law School
and Legal Determinants of External Finance, La Porta, Lopez-de-Silanes,
Shleifer and Vishny, Journal of Finance Vol 52, no 3, (1997). Back
The City's Importance to the EU Economy, Corporation of
London, January 2003. Back