EU Justice Commissionner,
Vice-President of the European Commission
The Next Steps Towards a European Contract Law for Businesses and Consumers
Keynote Speech at the Conference “Towards a European Contract Law” co-organised by the Study Centre for Consumer Law of the Catholic University of Leuven and the Centre for European Private Law of the University of Münster
Leuven, 3 June 2011
Dear Professor Stuyck, dear Professor Schulze,
Ladies and Gentlemen,
It is a pleasure to be with you today to discuss the challenges of European Contract Law. I am impressed to see so many bright legal minds from all over Europe who have come to Leuven for this purpose: Judges from national Supreme Courts and from the European Court of Justice, lawyers and notaries as well as advocates of consumer rights, high ranking officials of national ministries of Justice, and academic experts on European Contract Law from the major legal traditions which we have in Europe.
I am particularly pleased to see Ole Lando from the Copenhagen Business School, who is in many ways one of the fathers of the European Contract Law Movement. Already in 1976 – just seven years after the definitive abolition of customs duties between the Member States of the European Economic Community – Ole Lando started his famous “Commission on European Contract Law”, which led, on the basis of a comparative law analysis, to the development of the first set of Principles of European Contract Law. Without Ole Lando’s pioneering work on the Principles of European Contract Law, we would certainly not be meeting here in Leuven today.
There is a lot of wisdom and practical experience on contract law that has come together here in Leuven. The organisers are to be congratulated for having chosen this particular moment in time for their conference. Because this conference comes right before the European Parliament will vote on the future direction of European Contract Law on Tuesday next week. The conference also takes place at a moment when the Polish government, which will assume the Presidency of the EU Council of Ministers on 1 July, is preparing its policy agenda for the second half of the year – and European Contract Law is placed high on this agenda. Last but not least, this conference here in Leuven comes right at the moment when we in the European Commission are intensely reflecting on our next steps on European Contract Law.
In many ways, today is a “moment of truth” for European Contract Law. And I would like to make use of this moment to share with you my thoughts and further plans on this important matter.
The reason behind the policy interest in European Contract Law
Let us first pause for a moment and look back. Why have politicians in the European Union been thinking and debating about European Contract Law for more than 30 years, since the time Ole Lando created his famous Commission on European Contract Law?
The main reason for this is the EU’s ambition to create and complete a single market. A single market is defined, as you all know, as an area where transactions between Member States can take place as easily as domestic transactions. There should be no barriers for transactions across borders – neither for traders who want to offer their products and services to customers in other EU Member States, nor for consumers who want to shop from abroad in the EU. With this single market objective in mind, contract law had to come on the agenda sooner or later. Every economic transaction needs a contract as a legal basis. Contract law is the tool that allows economic transactions to happen, and therefore cannot be ignored in the establishment of a single market.
However, contract law has been developed over centuries within the framework of the nation state. Even though economically, the transaction of buying a car or downloading a song is practically the same everywhere in the world, its legal conditions are different depending on the country in which these transactions take place. This is no problem at all as long as transactions only take place within the nation state. However, these times are long gone. Globalisation has brought about international trade. And the European Union has brought about a situation in which the economies of individual EU countries depend to a very large extent on exports and imports to and from other EU Member States. The fact that Europe has more than 27 different legal systems for contractual transactions is therefore a formidable political challenge for Europe’s single market.
In the daily experience of traders and consumers, the legal diversity of Europe’s contract law systems, cherished though it may be from an academic perspective, can quickly transform itself into very concrete obstacles to cross-border transactions. This is notably the case in transactions between a business and a consumer. The Court of Justice recently decided that the mere fact that a small business operates a website in the language of another EU Member State can be seen as an indication that the business is directing its products and services to consumers in this other Member State. In terms of contract law, this means that the small business must respect not only the rules in its country of establishment, but also the rules that apply in the country where the consumer is resident. For the small business, this means that it needs to make a new risk assessment, as its business model is based on the domestic legal situation, and not on the situation in other countries. The business may have to obtain costly legal advice on other legal systems in the EU. The small business may even face the risk of being sued abroad.
It is therefore understandable that a recent survey reveals that a clear majority of small- and medium-sized companies in Europe consider this situation as an important obstacle to cross-border trade. The questions “Which law applies”, “Can I trust the legal systems of other countries” and “Where and for which price can I get swift and reliable legal advice?” all become an important factor. This can also be problematic for consumers. Bob Schmitz, an eminent lawyer of the Consumer Association of Luxembourg, has recently reminded me that for the simple purchase of a book from Amazon, several national contract laws may apply at the same time, leading to a substantial degree of legal uncertainty for businesses as well as for consumers.
For larger companies, these problems can still be solved with the help of their legal departments and external lawyers. However, smaller companies, which often have no or only a small legal department, are often faced with only two alternatives in such a situation: to continue cross-border transactions until stopped by legal challenges in other Member States; or to stop offering their products and services abroad.
Unfortunately, a considerable number of companies in Europe choose this second alternative. You may be aware of this notably if you want to make an online purchase from abroad of certain products and services and if you are a resident here in Belgium, in my home country Luxembourg, in Denmark, in the Baltic States or in Poland. There, you often get the following message on the website of the company: “Sorry, the product you have requested can not be purchased by you as you are a non-resident.”
Ladies and Gentlemen,
Next year is the 20th anniversary of Europe’s Single Market. A lot has been achieved over the past twenty years. However, how efficient and complete is our single market if certain products and services are not at all on the market in certain Member States of the European Union? How successful is a single market when only 8% of European consumers buy online from another Member State? Certainly, the lack of legal certainty is only one of the reasons for this. But it is at least as important a reason as the different languages which exist in the European Union. While we cannot and should not ever touch Europe’s linguistic diversity, the diversity of national contract law system is not an insurmountable obstacle. Laws can converge. Bridges can be built between different contract law systems. Common principles of contract law can be identified. Standardised Model Clauses can be developed by traders. And the European lawmaker can intervene to bring about change.
A new political momentum for European Contract Law
When I became EU Justice Commissioner on 10 February 2010, Commission President Barroso entrusted me, along with other issues, the responsibility for European Contract Law. Together with the President, I made the work on European Contract Law a strategic priority for the mandate of this Commission and included it in the Work Programme of the Commission.
We did this for very clear economic reasons. Europe’s economy needs all instruments – large and small – to stimulate growth and competitiveness and to make sure that consumers can draw more concrete benefits from Europe’s single market. The idea of a single market is that products and services of higher quality and lower price become available to consumers because of economies of scale. However, it appears that we do not have economies of scales yet in all fields, and that contract law is one of the reasons for this. We want to change this.
This is why the work on European Contract Law is a strategic priority of the EU’s Europe 2020 agenda. It is also a strategic initiative under the Commission’s Digital Agenda, which aims at completing the digital single market by 2020, thereby facilitating online transactions notably for consumers. The work on European Contract Law furthermore takes place in the strategic context of the Single Market Act which seeks to tackle the remaining obstacles to the completion of a true single market.
The Commission gave the work on European Contract Law new political momentum as we were impressed by the intensity and quality of comparative legal research on European Contract Law that had taken place since the set up of Ole Lando’s Commission in the 1970s. We were also impressed by the work invested in the Draft Common Frame of Reference, which is seen by some even as a blue print for a European Civil Code. The European Commission therefore did not have to start from scratch. But we could make use of the work done over the past 30 years as a basis for preparing a political initiative.
Political initiatives of the Commission are normally prepared in the following way: a political decision is taken to go ahead. Then, there is a two-month consultation period. And then the work on a draft legislative instrument starts in the Commission. Deliberately, we decided against going ahead at this normal rhythm this time. Contract Law is a complex and sensitive matter. We cannot and should not look at this subject only from the perspective of the economic imperatives. We need to take account of the different legal traditions and the historic background. We therefore decided to take more time with this than usual. And to take three very special measures for this.
First of all, we set up an Expert Group on European Contract Law last April. These experts came from all legal traditions in Europe, and included former judges, company lawyers, consumer advocates and academics. The members of this Expert Group were given a very demanding task: during 12 months, they were asked to make use of the existing academic research work produced over the past decades. And to narrow it down to the most relevant provisions that are needed, from a practical perspective, for transactions in the single market. I see that many of the members of the Expert Group are in the audience today. I want to thank you all for the very important work you have done during these 12 months. The so-called Feasibility Study which you produced is an extremely useful “tool box” for the EU legislator. It may not be complete. It may need further improvement. It may need streamlining, additions or deletions. But is a good basis for future discussion.
Secondly, the Commission established, in parallel to the Expert Group, a Group of Legal Practitioners, the so-called Sounding Board: representatives of the legal profession, businesses (large and small), and consumers, which met at regular intervals to follow and discuss the work of the Expert Group. We wanted the work of the Expert Group to be regularly challenged by people who work with contracts every day. To ensure that the work of the Expert Group stays in line with legal reality. There was always some constructive tension between the two Groups – the Experts and the Practitioners – and I welcome this. We wanted this tension to have discussion, debate and controversy. And thereby to allow for the development of the best possible solutions.
The third measure we took was to launch a further and intense public consultation on the future direction on European Contract Law. Some people asked me: Why do you consult again? The Commission had consulted on this matter regularly since 2000. Why hold another consultation now? My answer to this is: In the past, the work on European Contract Law was important, but not a policy priority. Now this has changed. We intend to move up a gear. And we want to consult on the exact legal form in which we should do this. This is why the Commission adopted a Green Paper last July which details all the possible options available to the Commission, reaching from a simple publication of the results of the Expert Group and going to a Regulation which would establish a full-fledged European Civil Code, compulsory for all 27 Member States, on the basis of the Draft Common Frame of Reference. To allow for ample time for public debate, we consulted for six months, more than three times longer than the Commission normally consults on such matters. I did this especially as I wanted to allow national Parliaments to express a first opinion on the matter. Having been a national Parliamentarian myself for ten years, I know how important it is to involve national Parliaments in such an important European project. And that full involvement of national Parliaments requires giving them appropriate time.
Where do we stand today on European Contract Law?
Today, the first phase of the work of this European Commission on European Contract Law has come to an end. Both the work of the Expert Group and of the Sounding Board of Practitioners has been concluded with the publication of the text of the Feasibility Study at the beginning of May. And the public consultation on the Green Paper ended in January this year, even though contributions still kept coming during the past weeks. Allow me to say a few words on both milestones of our work on European Contract Law.
The public consultation has triggered an impressive number of more than 300 contributions. I am particularly grateful that several national Parliaments have sent us detailed contributions. This is exactly the kind of European political discourse we need so that the Commission can make the right proposals. The views expressed, and the level of detail of most responses, all show a high degree of interest in European Contract Law. There is also a high degree of controversy about what the Commission should do next. While the English Legal Profession asks the Commission to be very cautious when it comes to contract law in view of the differences between the continental legal system and the common law, the Romanian Senate and the German lawyers’ association even favour an EU regulation that establishes a European Civil Code for the whole continent.
The Commission’s response to these views must in my view be a pragmatic and realistic one – and one that is different from what we have done in the past. For many years, the method chosen to strengthen the single market has been the road of ever more intense harmonisation. EU Directives were used to harmonise national provisions in this or that fields, thereby seeking to create a level playing field for businesses. We therefore have several sectorial Directives on issues such as distant selling contracts, time-share contracts, package travel contracts, and on unfair commercial practices. We are currently also discussing with Parliament and Council a broader Consumer Rights Directive. However, the practical experience with such proposals shows that, in a Union of 27 Member States, we appear to have reached the limits of what can be achieved by means of full harmonisation. Consumer organisations from across Europe have fought vigorously against full harmonisation of consumer rights, and many Member States did the same. When I became Justice Commissioner, I showed my sympathy for these concerns. Yes, we want and need to build a stronger single market. But we must at the same time ensure that this happens on the basis of a high level of consumer protection. Europe is not only a market economy, but a social market economy, as Article 3 of the Treaty on European Union says clearly. And we need to respect national traditions, in particular when it comes to national legal systems which have grown over the centuries. Contract law is a field where we need particular scope for subsidiarity. And this is why in the field of contract law I do not favour full harmonisation or a compulsory European Code.
After having seen the results of the public consultation – you can all read them on the Commission website – I have come to the conclusion that as regards contract law, we need a new approach. A new approach that on the one hand helps bring about the single market for businesses and consumers, while on the other hand respects Europe’s legal diversity and the principle of subsidiarity. For me, this can be achieved by proposing a legal instrument on European Contract Law that is voluntary and optional. That can be chosen by businesses and consumers and then serves as basis for their transactions. That does not replace existing national contract law, but that would exist alongside it. Such a voluntary and optional European Contract Law instrument would also respect the important principle of freedom to contract, which guides all my work on contract law.
We are still discussing the details of how this optional instrument should look like, and notably what should be its exact private international law effects. But one thing is clear: Nobody will be forced to use the optional instrument. The bottom line is choice. Only those who choose the instrument will be able to contract under it. Those who do not want to use it will continue to contract under national laws. This is in my view a soft and intelligent way of promoting the single market. It is also a very pro-competitive way: the optional instrument will only become a success if many businesses and consumers will find it attractive to make use of it for their transactions.
Of decisive importance will therefore be the content of the optional instrument. This has been raised in many contributions to the public consultation. Many wrote: The idea of an optional instrument is a very attractive one in theory, but before accepting it, we want to see how it will look like in practice. I agree with this. The optional instrument is only the regulatory method. What counts for businesses and consumers is what kind of instrument they can choose in practice; and what rules will apply to those who make use of the optional instrument.
We have a first basis for this with the Feasibility Study produced over the past 12 months by the Expert Group on European Contract Law and discussed with the Sounding Board of Legal Practitioners. The Feasibility Study of the Expert Group was published at the beginning of May and is already the subject of an impressive political and academic debate across Europe. A critical debate on substance will also be the subject of today’s conference, and our Commission experts will follow very closely your discussions to take account of your views in our further work.
The Feasibility Study is a very important starting point for the Commission. However – and let me underline this very clearly – the Feasibility Study is only a “tool box” for our future work. We may use some, but not all of the suggested articles of the Feasibility Study. We may also add some aspects where we believe that the Feasibility Study alone is not sufficient to reach our single market objective. And we will notably very carefully reflect how to achieve the best possible balance between business and consumer interests. The right balance between business and consumer interests is for me key to the success of the optional instrument.
From the public consultation and from discussion with interested stakeholders, I have identified a number of issues which the Commission will have to seriously consider in the coming months when producing our legislative proposal for the optional instrument. Some are more relevant for consumers, some are more relevant for businesses, and several are relevant for both.
There are in my view four key issues which we need to consider as a priority:
First of all, an optional instrument presupposes freedom of choice for the parties. We therefore need to make sure that consumers who buy books from Amazon do not contract under the optional instrument by accident. But only from their own, informed choice. This is why information and transparency are very important, notably from the perspective of a consumer. Professor Hans Schulte-Nölke, who participated in the Expert Group and whom I welcome here in Leuven today, has developed the idea of a “blue button” that would make it very visible to the consumer. “If you click here, then you contract under European Contract Law, not your national law.” That would be the message of the blue button. I find this a very good idea, but believe it needs to be complemented by a further measure: a legal requirement to inform the consumer about the most important features of the European Contract Law System in layman’s terms. We are currently considering how to include such information, in a standardised format, in our legislative proposal. The objective is clear: The optional instrument can only apply on the basis of a conscious decision by the consumer – and an explicit statement to that effect – that the consumer agrees to contract on the basis of the optional instrument. This would exclude any choice by mistake which results from a trader's standard contract terms.
Secondly, an optional instrument on European Contract Law must take the reality of our modern Information Society into account. Consumers today buy not only tangible goods such as books, clothes or cameras. They also use contracts to download music, films, software or aps for their iPhone. I therefore want to ensure that the optional instrument takes such digital situations into account. I would be very grateful to hear today your views on how this could be best achieved in terms of legal drafting.
Thirdly, we need to consider how to make the optional instrument particularly attractive for small- and medium-sized companies. After all, SMEs make up 99% of the businesses in the European Union. They are the lifeblood our single market, and this is why I want to make transactions in the single market easier and legally more certain for them. I want also to ensure that the optional instrument takes the specificities of SMEs into account, notably the fact that they can often be the weaker party in a business-to-business context. As a good example, I see in the Expert Group's Feasibility Study that companies would have a right to avoid a contract if one party takes an excessive advantage of the other party's lack of bargaining skills. This may be useful for the Commission to keep in the final proposal. I also see that unfair contractual terms which have been imposed on one party should not be binding. This can be an important support for the contractual situation of an SME in a business-to-business situation. Such provisions may even put a small business in a better position compared to its own domestic law. Let's take the example of a small, UK-based builders' merchant that buys window frames from a Finnish company. The Finnish company does not deliver the goods and offers compensation instead. Under the Expert Group's text, the builders' merchant would be entitled to insist on the delivery of the windows so it could fulfil its own contracts with customers. Under English law, such an “order of specific performance” would only be granted under certain restrictive conditions. I believe we should work on such targeted improvements which take specific account of the situation of SMEs.
Fourthly, the Commission will need to decide whether the optional instrument should be only made available for cross-border transactions. Or whether it should also apply to domestic transactions if chosen by the parties to the contract. Many contributions to the public consultation tell us that it would be unwise to make a distinction between cross-border and domestic transactions as it is the very essence of the single market that both situations are treated alike. Others are urging the Commission to limit the scope of the optional instrument to cross-border contracts in order not to disturb at all national legal systems. I can understand both camps of this argument, and I will continue to listen to both of them. Perhaps the best solution for the Commission is to choose a middle way: to limit the scope of the optional instrument to cross-border contracts; but to allow Member States to extend the application of the optional instrument also to domestic contracts. I would be grateful to hear your views on this important matter.
The next steps
Ladies and Gentlemen,
The Polish Presidency of the Council of Ministers expects the Commission to present a legislative proposal on an optional European Contract Law in October this year. I know also that the European Parliament is urging me to come forward with a legislative proposal in the coming months. I have committed both to the European Parliament and to the Polish Presidency that the Commission will deliver such a proposal. And you can count on me that I will stick to this commitment.
However, for me, quality is as important as good timing. This is why the Commission experts will be working very intensely over the coming weeks to write the best possible legislative proposal. And to analyse all policy options in detail in the impact assessment on which we are working at the moment. Not everyone may be aware of this, but there is no proposal from the Commission without a detailed assessment of its economic and social consequences. Working on such an assessment always improves the quality of a proposal. This is why I have from the beginning asked my services to give utmost importance to the preparation of a solid, well documented impact assessment that we will discuss in detail in the Commission during this summer.
Your conference here in Leuven today marks an important moment on the road to an attractive European Contract Law instrument. The views which you will express here today, or afterwards in writing, will strongly inspire the European Commission’s further work on our legislative proposal; as will other contributions which we are receiving in these days from all over Europe. In further refining our work, we should never lose sight of the fact that choice is the foundation on which the optional instrument will be built. The attractiveness of the optional instrument for businesses will therefore be as important for its success as the confidence of consumers that they can feel safe and well protected under this instrument. If we manage to achieve this, then Europe’s single market will make a big step forward this autumn.
Ladies and Gentlemen,
Allow me to conclude with a last thought. Contracts and legal instruments are without any doubt very important for businesses, consumers and for our single market. They are certainly a necessary condition for successful European integration in this field. However, we all should be realistic in understanding that more will be needed than a legislative proposal from the Commission to complete his work. In the long run, the optional instrument on European Contract Law needs to become embedded in a European legal culture where lawyers, judges and academics progressively develop a joint understanding of the principles of private law as they are common to the legal systems of our Member States and of the evolving acquis communautaire. We also will need to complement the optional instrument by model clauses for other contracts and situations which will not be covered by the optional instrument. The European Parliament is rightly underlining this aspect.
It is therefore good news that on Wednesday this week, legal practitioners and academics have founded the European Law Institute, which sees as its key task the further development of a European legal culture. The Commission had already supported the idea for such an Institute in our Action Plan implementing the Stockholm Programme, and I am pleased to see how quickly an idea could be turned into reality. Many people here in this room deserve praise for their work on this. We all know the important role that the American Law Institute played in the evolution of the Uniform Commercial Code in the United States of America. Of course, Europe is very different from the US, and this is why the Commission is not working on a Uniform European Contract Law, but on an optional and voluntary European Contract Law. For historic reasons, Europe is better able to accommodate more diversity and choice than the single market of the US. As diversity will continue to be a determining factor of Europe’s legal systems, as well as with the new optional instrument, the work of the European Law Institute may become even more important than that of the American Law Institute.
“Unity in diversity” is Europe’s challenging motto. I expect the optional European Contract Law to become a very prominent illustration of why this motto is the right one. Because it is not uniformity we want to achieve. But practical offers and new attractive options to make the single market function better at the service of Europe’s businesses and our citizens.
Thank you very much for your attention.