Select Committee on European Union Written Evidence

Memorandum by Clifford Chance


  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.

Article III-170

  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 market"

  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 heading.

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[1] 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[2].

  The harmonisation of contract law would damage, therefore, not just the City of London, but also the EU as a whole.

Article III-68

  "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 consumer watchdog.

  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

2   The City's Importance to the EU Economy, Corporation of London, January 2003. Back

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